Mathematical Finance Seminar

November 1, 2001 , 5:30 PM to 7:00 PM

Edward Altman, NYU Stern School of Business

Measuring corporate bond mortality and performance

This study develops an alternative way to measure default risk and suggests an appropriate method to assess the performance of fixed-income investors over the entire spectrum of credit-quality classes. The approach seeks to measure the expected mortality of bonds and the consequent loss rates in a manner similar to the way actuaries assess mortality of human beings. The results show that all bond ratings outperform riskless Treasuries over a ten-year horizon. The results also show a distinct aging effect on corporate bond defaults which is different from the impression one gets from observing default rates as calculated by Moody's (dynamic cohort) and S&P (static pool) approaches. These results will be updated through 2000, with traditional default rate data from 2001, year-to-date. This year is already the highest default year in terms of dollars and one of the highest in terms of default rates.