An investor in a corporate obligation is exposed to the default risk of the obligor. In this article, the author adapts the dynamic valuation framework to disaggregate systematic…
Abstract
An investor in a corporate obligation is exposed to the default risk of the obligor. In this article, the author adapts the dynamic valuation framework to disaggregate systematic and idiosyncratic default risk of credit instruments. By articulating the distinction between diversifiable and undiversifiable risk, the article develops a two‐factor model for pricing default risk.