
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 VidovicsDancs, János Péter Rádics European Council for Modeling and Simulation. doi:10.7148/2017 ISBN:
9780993244049/ ISBN:
9780993244056 (CD) 31st European Conference on Modelling and
Simulation, Budapest, Hungary, May 23^{rd}
– May 26^{th}, 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
VidovicsDancs, János Péter Rádics European Council for Modeling and
Simulation. doi: 10.7148/20170041 
DOI: 
https://doi.org/10.7148/20170041 
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 fiftyfive 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 nonhomogeneous
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 longrun
in Hungarian corporate lending. The elaborated models can be easily
implemented at Hungarian corporate financial institutions. 
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