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Hi David,

I have a quick question about default intensity. This may be a silly question, but does past history (not including defaults) have anything to do with default intensity for the Poisson or exponential distributions? I think the answer is no but I am not sure. In other words, if a firm is in business today and the lambda is 0.2, this means that at this very instant there is a 20% chance of it defaulting. It also means that if I want to find the probability that it will default in the next 3 years I just use the exponential cdf. If I do the same “test” in one year, the parameters are the same because of the distribution we are using, and the info I get will tell me the exact same thing.

Perform “test” in 2009: 45.12% chance of failing in three years (by 2012)

Perform “test” in 2010(conditional that it still has not defaulteded): 45.12% chance of failing in three years (by 2013)

Thank you,

Mike

I have a quick question about default intensity. This may be a silly question, but does past history (not including defaults) have anything to do with default intensity for the Poisson or exponential distributions? I think the answer is no but I am not sure. In other words, if a firm is in business today and the lambda is 0.2, this means that at this very instant there is a 20% chance of it defaulting. It also means that if I want to find the probability that it will default in the next 3 years I just use the exponential cdf. If I do the same “test” in one year, the parameters are the same because of the distribution we are using, and the info I get will tell me the exact same thing.

Perform “test” in 2009: 45.12% chance of failing in three years (by 2012)

Perform “test” in 2010(conditional that it still has not defaulteded): 45.12% chance of failing in three years (by 2013)

Thank you,

Mike

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