Help!I need to know, what is JTD, and how is it calculated / measured? can anyone recommend a good source?Thanks!Tom

Recently attending a lecture and came across this, but only a verbal explanation and not mathematical one."Essentially, people who buy very short dated protection are hedging their jump to default risk.. so one is hedging against a sudden default in the market in the near future, as opposed to a gradual credit deteriation. It is this value at risk that is quantified as 'jump to default'"

Thanks, I also found a source on the Fitch website, which I thought I would copy verbatim, as it's quite interesting:"Value on DefaultDeltas and DV01s assess the impact of a fall in the credit quality of a reference entity symbolised by a widening of its spread, but do not address the effect of a default on the value of a CDO tranche. Investors should look at Value on Default (VOD ) in combination with DV01 to get a fuller picture of the risk involved, especially if they are worried about the long-term health of an entity rather than a cyclical lull.Fitch defines the VOD sensitivity as the net profit and loss of a tranche position resulting from an instantaneous default of a credit, keeping all other credit spreads in the portfolio unchanged. For unhedged tranches, the default risk is high, for delta-hedged tranches, lower, but it can still be significant. Ideally, when hedging a synthetic CDO tranche, it is best to be delta- as well as defaultneutral.A typical approach to combine delta- with default- hedging is the following: Apply deltahedging as described above, but also trade short-term CDSs to be default-neutral too (if the maturity of the CDS contracts are very short, the delta is close to zero).The following chart shows the equity, mezzanine and senior VOD for several names in the iTraxx EUR IG S5 index. It can be seen that the VOD is largest for the equity tranche, which actually includes the settlement payment of the underlying name. The VOD also strongly corresponds to the spreads of the underlying names and wider spread names have higher VODs. This makes sense intuitively as removing wider spread names will have a larger impact on the PV and VOD of the tranche than for tighter spread names. The default of a high spread name will cause a larger improvement in the credit quality of the remaining performing portfolio compared to a low spread name.Assuming the net loss amount is the same in both cases (same recovery and same notional) the tranche PV following default of a high spread name will be greater compared to a low spread name. Of course the PV change is usually dominated by the reduced AP following the default of a name, which reduces the PV for the protection seller, since the spread remains the same. However the improved creditquality of the remaining portfolio compensates for some of the effect of the lower attachment points. As a result the VOD for a high spread name is higher compared to the VOD of a low spread name."

As lengxish stated, Jump-to-default is the risk of default as opposed to the the risk of change in credit spreads. The concept is model dependent. It makes the most sense if you imagine a default process in which p, the one-day probability of default, follows a random walk (with absorbing barriers at zero and one). Every day, a draw is taken from a uniform (0,1) distribution and if it is less than p, the entity defaults. Now you have a clear separation between spread risk (p moving up or down) and jump to default (getting a draw that results in default).Instead, we could say x follows a random walk with absorbing barriers at 0 and 1, and if it ever hits 1, the entity defaults. Given the dynamics of x and its current value, we can compute probability of default over any interval. Now it's not clear what the difference is between spread movements and jump-to-default. For many credit models, jump-to-default is not well-defined. In practice, we might define jump-to-default risk as the risk the entity will default over a period of time such that the probability of default is less than, say, 1%.From a market point of view, suppose I go long $20 million of 5-year single-name CDS protection on a name and short $10 million of 10-year. If there is a default, I make $10 million times the loss fraction. But if the credit spread ticks up or down in a parallel shift, the value of my position is unchanged (to a first approximation, anyway). So this position is a pure jump to default bet. If I want to make a pure spread bet, I go long $10 million of the 5-year and short $10 million of the 10-year. Now I make money if the probability of default goes down, but don't make or lose money in a default.

Thanks, that's very interesting.

Hi,Sorry to reopen such an old topic but just wanted to ask about this again with a new point of view. I am working on doing some research into an equity model and one of the suggested improvements is Jump To Health (as opposed to Jump to Default which is already considered and incorporated). Was wondering what the high level implications of introducing JumpToHealth would be. I can't find much literature on the subject except for this link https://www.cmegroup.com/trading/cds/fi ... -model.pdf Would I be correct in saying that the level of volatilities in the model would be reduced by introduction of JumpToHealth as credit spreads would tighten with this? Sorry if the question is a bit vague...still trying to get to grips with it!

Wouldn't the effects of JumpToHealth depend on the cause? An operational improvement (e.g., announcement of new sales, profits etc.) might change the probability of default but not the rate of recovery conditional on default. An improvement in capital structure (e.g.. new subordinate debt) might change both.

Default of a bond in reduced form model is formally defined with an abstract issue such as risk free T-bond. If you talk about corporate bond then Health should be assumed to be equal to risk free level. If we are talking about a stock everything is looking rather informal either default or health. To be more accurate take for example a big 2008-mortgage, or 2015-oil company, or twitter. Based on examples one can easy verify his intuition.