Modelling the Evolution of Credit Spreads in the United States

Available as: PDF

The authors use Jarrow and Turnbull's (1995) reduced-form methodology to model the evolution of the term structure of interest rates in the United States for different credit classes and different industries. The authors also estimate a liquidity function for each credit class and industry. Using data from individual firms, the authors estimate the probability of default under the natural measure and compare it with the estimated default frequencies produced by KMV.