ABSTRACT
So far, default has mostly been modeled as a binary event (except the intensity model), suited for single-period considerations within the regulatory framework of a fixed planning horizon. However, the choice of a specific period like one year is more or less arbitrary. Even more, default is an inherently time-dependent event. This chapter serves to introduce the idea of a term structure of default probability. This credit curve represents a necessary prerequisite for a time-dependent modeling as in Chapters 7 and 8. In principle, there are three different methods to obtain a credit curve: from historical default information, as implied probabilities from market spreads of defaultable bonds, and through Merton’s option theoretic approach. The latter has already been treated in a previous chapter, but before introducing the other two in more detail we first lay out some terminology used in survival analysis (see [28, 33] for a more elaborated presentation).
