PD vs EDF?

[sridhar]

David,

Minor nit...

In the various Credit Risk readings -- PD and EDF are used almost interchangeably. Are these exact synonyms -- or is there a usage context in which the use of the term "PD" is more appropriate than "EDF" and vice-versa. Are there some types of risk managers that would always refer to the underlying likelihood of default as PD, while others use EDF?

--sridhar

 

[David Harper CFA FRM]

sridhar,

EDF is trademark of Moody's KMV...but otherwise they are interchangeable, in my estimation. I consulted to KMV a few years back and I imagine a KMV exec might draw a distinction but I don't know of any conceptual difference to warrant a semantic distinction. In the notes, i think i try to follow the authors; e.g., Ong uses EDF

I'd imagine KMV would argue EDF is "predictive" or forward-looking b/c it employs a structural model (i.e., uses the stock price to infer PD) but I don't think PD precludes that. IMO, PD = EDF but arguably EDF implies KMV and it may be for some that EDF implies a structural approach.

David