Scenario Analysis with the DD-PD Mapping Approach: Stock Market Shocks and U.S. Corporate Default Risk
May 20, 2021
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Summary
This paper introduces the quantile regression- based Distance-to-Default to Probability of Default (DD-PD) mapping, which links individual firms’ DD to their real world PD. Since changes in the DD depend on a handful of parameters, the mapping easily accommodates shocks arising from quantitative and narrative scenarios informed by expert judgment. At end-2020, risks from stock market corrections in the U.S. are concentrated in the energy, financial and technology sectors, and additional bank capital needs could be large. The paper concludes discussing uses of the mapping beyond PD valuation suitable for capital structure analysis, credit portfolio management, and long-term scenario planning analysis.
Subject: Economic sectors, Financial crises
Keywords: default risk, distance-to-default, probability of default, quantile regression, scenario analysis, stock markets, stress test
Pages:
24
Volume:
2021
DOI:
Issue:
143
Series:
Working Paper No. 2021/143
Stock No:
WPIEA2021143
ISBN:
9781513573533
ISSN:
1018-5941
