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Digital Library

of the European Council for Modelling and Simulation

 

Title:

Lifetime Probability Of Default Modeling For Hungarian Corporate Debt Instruments

Authors:

Tamas Kristof, Miklos Virag

Published in:

 

 

 

(2017).ECMS 2017 Proceedings Edited by: Zita Zoltay Paprika, Péter Horák, Kata Váradi, Péter Tamás Zwierczyk, Ágnes Vidovics-Dancs, János Péter Rádics

European Council for Modeling and Simulation. doi:10.7148/2017

 

 

ISBN: 978-0-9932440-4-9/

ISBN: 978-0-9932440-5-6 (CD)

 

 

31st European Conference on Modelling and Simulation,

Budapest, Hungary, May 23rd – May 26th, 2017

 

Citation format:

Tamas Kristof, Miklos Virag (2017). Lifetime Probability Of Default Modeling For Hungarian Corporate Debt Instruments, ECMS 2017 Proceedings Edited by: Zita Zoltay Paprika, Péter Horák, Kata Váradi, Péter Tamás Zwierczyk, Ágnes Vidovics-Dancs, János Péter Rádics European Council for Modeling and Simulation. doi: 10.7148/2017-0041

DOI:

https://doi.org/10.7148/2017-0041

Abstract:

Since there has been a rising awareness about health, food safety and environmental The paper attempts to provide forecast methodological framework and concrete models to estimate long run probability of default term structure for Hungarian corporate debt instruments, in line with IFRS 9 requirements.

Long run probability of default and expected loss can be estimated by various methods and has fifty-five years of history in literature. After studying literature and empirical models, the Markov chain approach was selected to accomplish lifetime probability of default modeling for Hungarian corporate debt instruments.

Empirical results reveal that both discrete and continuous homogeneous Markov chain models systematically overestimate the long term corporate probability of default. However, the continuous non-homogeneous Markov chain gives both intuitively and empirically appropriate probability of default trajectories. The estimated term structure mathematically and professionally properly expresses the probability of default element of expected loss that can realistically occur in the long-run in Hungarian corporate lending. The elaborated models can be easily implemented at Hungarian corporate financial institutions.

 

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