Quick question about default rates

[wrongsaidfred]

Hi David,

In all three default rates, are only issuances that take place during that period counted or all issuances in the market? In other words, suppose the rate is taken from 1980 to 2010. A bond defaults in 1990 that was issued in 1975, would this count in the numerator, denominator, both or neither?

Thanks,
Mike

 

[David Harper CFA FRM]

Hi Mike,

I'm not sure (offhand) which is the third (of three) but typically the ratio is based on value/(or number #) of issuances as of the beginning of the year (e.g., a bond that defaults in 1990, that was issued in 1975, would be included in 1990 default rate data). Further, typically value/(or number #) would be in both numerator and denominator.

When in doubt, it's typically good to guess for "ratio consistency." This is my favorite ratio guiding principle. For example, consider RAROC. Is expected loss (EL) included or excluded? Answer, either but should be consistent. Our definition is Crouhy which gives:

RAROC = (numerator stuff - EL) / (EC excludes EL); EL is excluded from both is "ratio consistency"

Thanks, David

 

[wrongsaidfred]

Hi David,

The ratio consistency makes perfect sense.

Thanks,
Mike