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WorldWide Corporate Credit Conditions At 86th Percentile $AGG, $JNK, $HYG http://seekingalpha.com/p/24phr Dec 22, 2014

The Relationship Between Credit Spreads And Default Probabilities, December 19, 2014 $AGG, $BND, $BOND http://seekingalpha.com/p/24pjf Dec 22, 2014

U.S. Dollar Cost Of Funds Index 0.931% At 5 Years, December 19, 2014 $BAC, $C, $JPM http://seekingalpha.com/p/24pj5 Dec 22, 2014
Latest Comments
 Donald van Deventer on Vanguard Natural Resources 1 Year Default Probability Falls 2.61% To 35.42% Vanguard Natural Resources is currently the sec...
 Donald van Deventer on Vanguard Natural Resources 1 Year Default Probability Falls 2.61% To 35.42% Will update first thing tomorrow, thanks!
 leedave on Vanguard Natural Resources 1 Year Default Probability Falls 2.61% To 35.42% What is the probability of VNR defaulting now?
 Donald van Deventer on Ranking The 20 Riskiest CCAR Banks By One Year Default Probability Good question and one that has two parts. The f...
 ocpaddler on Ranking The 20 Riskiest CCAR Banks By One Year Default Probability This post reminded me of the exchange we had aw...
 Donald van Deventer on Elizabeth Arden Bonds Due 2021 Jump From 75.40 To 101.90 On Revlon Tender SS, always a pleasure. We'll be adding a lot mo...
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 An Update On The Iconix Brand Group 1.5% Bonds Due March 15, 2018 ( Comments)
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(click to enlarge)
The blue line is the firm's one year default probability. The yellow line is the annualized one month default probability.
Background on the Default Probability Models Used
The Kamakura Risk Information Services version 5.0 JarrowChava reduced form default probability model ( abbreviated KDPjc5) makes default predictions using a sophisticated combination of financial ratios, stock price history, and macroeconomic factors. The version 5.0 model was estimated over the period from 1990 to 2008, and includes the insights of the worst part of the recent credit crisis. Kamakura default probabilities are based on 1.76 million observations and more than 2000 defaults. The term structure of default is constructed by using a related series of econometric relationships estimated on this data base. Free trials are available at Info@Kamakuraco.com. An overview of the full suite of Kamakura default probability models is available here.
General Background on Reduced Form Models
For a general introduction to reduced form credit models, Hilscher, Jarrow and van Deventer (2008) is a good place to begin. Hilscher and Wilson (2013) have shown that reduced form default probabilities are more accurate than legacy credit ratings by a substantial amount. Van Deventer (2012) explains the benefits and the process for replacing legacy credit ratings with reduced form default probabilities in the credit risk management process. The theoretical basis for reduced form credit models was established by Jarrow and Turnbull (1995) and extended by Jarrow (2001). Shumway (2001) was one of the first researchers to employ logistic regression to estimate reduced form default probabilities. Chava and Jarrow (2004) applied logistic regression to a monthly database of public firms. Campbell, Hilscher and Szilagyi (2008) demonstrated that the reduced form approach to default modeling was substantially more accurate than the Merton model of risky debt. Bharath and Shumway (2008), working completely independently, reached the same conclusions. A followon paper by Campbell, Hilscher and Szilagyi (2011) confirmed their earlier conclusions in a paper that was awarded the Markowitz Prize for best paper in the Journal of Investment Management by a judging panel that included Prof. Robert Merton.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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