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The Journal of Fixed Income

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Primary Article

Annual Default Rates are Probably Less Than Long-Run Average Annual Default Rates

Nicholas M. Kiefer
The Journal of Fixed Income Fall 2008, 18 (2) 85-87; DOI: https://doi.org/10.3905/jfi.2008.712352
Nicholas M. Kiefer
Ta-Chung Liu Professor in the Departments of Economics and Statistical Science at Cornell University in Ithaca, NY, and Senior Economist, Office of the Comptroller of the Currency, Risk Analysis Division in Washington, DC.
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  • For correspondence: nicholas.kiefer@cornell.edu
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Abstract

Banks using either the Foundation or Advanced option of the internal ratings based approach to credit risk under Basel II capital requirements must estimate long-run annual average default probabilities for buckets of homogeneous assets. The one-factor model underlying the capital calculations in Basel II has implications for the distribution of average (across assets) default rates over time. One of these implications is that the average default rate in any period is probably smaller than the overall average default rate (over time and assets). The lesson for practitioners is that the short-term default experience of new, very safe assets is likely to underpredict the true long-run default rate for these assets.

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The Journal of Fixed Income
Vol. 18, Issue 2
Fall 2008
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Annual Default Rates are Probably Less Than Long-Run Average Annual Default Rates
Nicholas M. Kiefer
The Journal of Fixed Income Sep 2008, 18 (2) 85-87; DOI: 10.3905/jfi.2008.712352

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Annual Default Rates are Probably Less Than Long-Run Average Annual Default Rates
Nicholas M. Kiefer
The Journal of Fixed Income Sep 2008, 18 (2) 85-87; DOI: 10.3905/jfi.2008.712352
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