Credit Risk Models

Abstract

This chapter reviews the most common credit risk models. A number of approaches have been developed to price credit-risky bonds. Credit risk pricing approaches usually fall into two categories. One group is based on the evolution of the firm value to determine default and recovery rate, called firm value models. The more recently introduced intensity models, on the other hand, specify an exogenous default process which governs default. The default process is usually a Poisson-like process and the recovery rate is often exogenous to the model. Of course, this distinction is not clear-cut and some models use elements of both approaches.