Using term structure data of Credit Default Swap (CDS) spreads for the four Japanese mega-banks and the government, we jointly estimate the default intensity and expected recovery (loss) given a default. In doing so, we attempt to further identify the difference in the expected recovery ratios between senior and subordinated CDS contracts. Estimation results are summarized as follows. (i) The d...

1 Abstract. We present a development of the theory of default information structures, combining ideas from domain theory with ideas from non-monotonic logic. Conceptually, our treatment is distinguished from standard default logic in that we view default structures as generating models rather than theories. Reiter's default rules are viewed as non-deterministic algorithms for generating preferr...

In default reasoning, usually not all possible ways of resolving conflicts between default rules are acceptable. Criteria expressing acceptable ways of resolving the conflicts may be hardwired in the inference mechanism, for example specificity in inheritance reasoning can be handled this way, or they may be given abstractly as an ordering on the default rules. In this article we investigate fo...

We consider the optimal portfolio problem of a power investor who wishes to allocate her wealth between several credit default swaps (CDSs), a stock index, and a money market account. We model contagion risk among the reference entities in the portfolio using a reduced form Markovian model with interacting default intensities. Using the dynamic programming principle, we establish a lattice depe...

We develop a multicountry model in which default in one country triggers default in other countries. Countries are linked to one another by borrowing from and renegotiating with common lenders with concave payoffs. A foreign default increases incentives to default at home because it makes new borrowing more expensive and defaulting less costly. Foreign defaults tighten home bond prices because ...

Expert knowledge can often be represented using default rules of the form “if A then typically B”. In a probabilistic framework, such default rules can be seen as constraints on what should be derivable by MAP-inference. We exploit this idea for constructing a Markov logic networkM from a set of first-order default rules D, such that MAP inference fromM exactly corresponds to default reasoning ...

Reiter’s default logic formalizes nonmonotonic reasoning using default assumptions. The semantics of a given instance of default logic is based on a fixpoint equation defining an extension. Three different reasoning problems arise in the context of default logic, namely the existence of an extension, the presence of a given formula in an extension, and the occurrence of a formula in all extensi...

Default logic is supposed to reason with static and consistent default theory, i.e., it can not deal with inconsistencies arising in the situation that an agent receives a sequence of information represented by default theories. To overcome the problem, revision operators for revising default theories have been investigated by many researchers. But none of them has discussed the postulates whic...

A recently derived function ties a portfolio’s loss given default rate (LGD) to its default rate. This study compares the predictive performance of the LGD function to that of linear regression using simulated data. The data are simulated using a linear model. Even though this confers an advantage to linear regression, the LGD function produces lower mean squared error over a meaningful range o...