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Donald van Deventer
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Donald R. van Deventer founded the Kamakura Corporation in April, 1990 and is currently Chairman and Chief Executive Officer. Dr. van Deventer's emphasis at Kamakura Corporation is enterprise wide risk management and modern credit risk technology. The second edition of his newest book, Advanced... More
My company:
Kamakura Corporation
My blog:
Donald R. van Deventer's Kamakura Blog
My book:
Advanced Financial Risk Management, 2nd Edition 2013
  • Arch Coal Inc. 1 Year Default Probability 1.31%, Up 0.03% Today 2 comments
    Dec 11, 2013 11:23 AM | about stocks: ACI, XLE, VDE, IYE, DBE, RYE

    (click to enlarge)

    arcj131i[3

    The Kamakura Risk Information Services version 5.0 Jarrow-Chava reduced form default probability model ( abbreviated KDP-jc5) makes default predictions using a sophisticated combination of financial ratios, stock price history, and macro-economic 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. KRIS covers 35,000 firms in 56 countries, updated daily. 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 follow-on 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.

    Themes: energy, basic materials Stocks: ACI, XLE, VDE, IYE, DBE, RYE
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  • freeman8201
    , contributor
    Comments (546) | Send Message
     
    what do you think of their recent asset sell and refinancing of their debt by buying 2016 notes and a plan to issue 2019 senior notes?
    16 Dec 2013, 07:04 PM Reply Like
  • Donald van Deventer
    , contributor
    Comments (1117) | Send Message
     
    Author’s reply » Freeman, I haven't followed the firm's bond deals but I'd say this as a general rule. Unless the bonds were called, an exchange offer or refinancing is often just welfare for investment bankers. An exception is when the exchange is designed to avoid bankruptcy. Given their risk level, asset sales are smart. It's the only way to prove your risk is lower than the market thinks. BP PLC did the same thing after the Gulf oil spill. Thanks for reading!
    16 Dec 2013, 07:29 PM Reply Like
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