BFS 2002

Poster Presentation

Default Boundary Problem

Alexander Kreinin, Ian Iscoe

In this paper we consider a credit risk estimation problem that we call "Default Boundary Problem" and a related inverse problem for a random walk. This latter problem is formulated as follows: find a boundary such that the first hitting time has a known probability distribution function. We demonstrate that a Monte Carlo approach is applicable to solve the Default Boundary Problem in the discrete time setting. We also consider numerical aspects of the computation of conditional default probabilities in the joint market and credit risk framework.