Advances in Risk Management

JEAN-DAVID FERMANIAN AND MOHAMMED SBAI 135

Table 7.1Average default rates over 1981–2002

Rating CCC B BB BBB A AA AAA

PD (%) (1 year) 27.87 6.20 1.38 0.37 0.05 0.01 0.00

Source: Standard & Poor’s.

200

0

4

8

12

% Frequency

16

20

24

600 1000 1400

Losses

rho 0.44721

Figure 7.1Histogram of losses in the Merton model

• 20 firms rated A


• 20 firms rated BBB


• 15 firms rated BB


• 10 firms rated B


• 5 firms rated CCC

Constant exposure levels drawn randomly between 0 and 100.^4 Once they
have been simulated, these exposure levels will be kept constant during
the whole study. Their maturities are assumed infinite: when a default
event is simulated, it always induces a non zero loss (whose value is the
previous level associated with the defaulted counterparty). With such
choices, we obtain Figure 7.1.