Serving the Quantitative Finance Community

 
User avatar
marklar
Topic Author
Posts: 1
Joined: December 22nd, 2006, 1:12 pm

credit risk markov chain

April 4th, 2017, 6:17 am

Hi All,
When using markov chains it is usualy assumed that it has an absorbing state (aka default). I wonder why this is needed? I know that it is neccessary to have a unique stationary distribution, but are there other considerations as well? Besides it is not a valid assumption in practice (eg Basel2 definition allows cure from default).
Thanx, M
 
User avatar
Gamal
Posts: 1533
Joined: February 26th, 2004, 8:41 am

Re: credit risk markov chain

April 4th, 2017, 6:48 am

Be more specific.