The Jarrow/Turnbull Default Risk Model Evidence from the German Market

Science Direct Working Paper No S1574-0358(04)70696-6

26 Pages Posted: 2 Apr 2018

See all articles by Leopold Sögner

Leopold Sögner

Institute for Advanced Studies (IHS); Vienna Graduate School of Finance (VGSF)

Date Written: October 2001

Abstract

In this article we estimate default intensities within the continuous time Jarrow/Turnbull (1995) model from daily observations of German bank bond prices, based on the default-free term structure estimated from the Svensson (1994) model provided by the Deutsche Bundesbank. Cross-sectional and time-series estimations are performed. We show that pricing errors from the term structure estimation are passed on to the Jarrow/Turnbull model and that estimated default intensities strongly depend on the estimation period and on the bond used for estimation. This result strongly supports separate estimation over cross-sectional estimation. We cannot Infer a significant Influence of liquidity on the default intensities. We show that the assumptions of the Jarrow/Turnbull model are not sound with the underlying data. Furthermore, we Investigate the optimum volume of data required to provide reasonable estimates of the default Intensity. By this we show that daily calibration need not minimize the ex-ante pricing errors. Comparisons with other literature, where default-risky term structures are estimated separately from the defaultfree term structure, show that even using a very simple model the pricing errors can be decreased substantially.

Keywords: Credit Risk, Intensity-based models, Jarrow/Turnbull model, Term Structure of Interest Rates, C52, G12, B13, E43

Suggested Citation

Sögner, Leopold, The Jarrow/Turnbull Default Risk Model Evidence from the German Market (October 2001). Science Direct Working Paper No S1574-0358(04)70696-6, Available at SSRN: https://ssrn.com/abstract=3153614

Leopold Sögner

Institute for Advanced Studies (IHS) ( email )

Josefstädter Straße 39
1080 Vienna
Austria

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

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