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2004 Clarendon Lectures in Finance

Speaker:Professor Darrell Duffie, James I Miller Professor of Finance,

Graduate School of Business, Stanford University



Default Risk: Measurement and Pricing


The Clarendon Lectures in Finance were given by Darrell Duffie.  He spoke on the subject of “Default Risk: Its Measurement and Pricing” and the subject of his three lectures were bankruptcy probabilities, default risk pricing and default correlation.  



In his first lecture, Darrell Duffie examined the historical patterns of default, the default intensity, some structural models of default and estimates of the term structure of default probabilities.   He examined the performance of credit ratings in predicting defaults and derived estimates of survival probabilities based on default rates.  He then reported estimates of Chapter 11 and Chapter 7 failures in the US over the period 1971 to 2001 based on the distances of firms from default (the number of standard deviations distance of assets from liabilities) and a macroeconomic variable – personal income growth.  From this he was able to derive a term structure of default probabilities. 



In his second lecture, Darrell Duffie turned to the pricing of default risk.  He described how default probabilities can be determined from credit market spreads and expected losses given default.  He used this to determine the risk premium on default insurance provided by credit derivatives.  He showed that there was considerable time variation in the risk premium associated with credit derivatives with peaks in the premium occurring in the middle of 2002.  He argued that this may have been due to a shortage of capital in the market at that time.



In his third lecture, Darrell Duffie extended his analysis to multiple issuers and the effect of correlation in defaults.  He reported that one year average default event correlations within sectors average around 5%. A commonly employed technique to dealing with correlations is a copula, which specifies correlations in variables such as default times whose probability distributions are already determined.  He argued that this approach is unsatisfactory in so far as it does not include both correlated default and correlated uncertain changes in spreads.  He argued that the double stochastic model does not capture correlation in default intensity processes.  This may be due to missing covariates that lead to omitted common factors.





The event was sponsored by

About the Clarendon Lectures in Finance

"In 1987 Oxford University Press established the Clarendon Lectures in Economics, the first in what has become a wide range of Clarendon Lectures series. The Press sponsors the visit to Oxford of a distinguished economist who delivers three public lectures to undergraduates, graduates and faculty members from Oxford and nearby universities. The lectures form the basis of a book which is published by the Press. Many of these books have made a notable contribution to the literature.

To reflect the growth of the academic study of Finance in Business Schools and Economics Faculties generally and in particular in our own Said Business School the Press has established a series of Clarendon Lectures in Finance.




Other Past Clarendon Lectures


Clarendon Lecture 2003

Speaker: Professor Franklin Allen


Understanding Financial Crises 


Banking Crises

Currency Crises

Bubbles and Crises



Clarendon Lecture 2002

Speaker: Professor Michael Brennan


Trade and Information




Papers by Darrell Duffie


Multi-Period Corporate Failure Prediction With Stochastic Covariates

Measuring Default Risk Premia from Default Swap Rates and EDFs

Common Failings: How Corporate Defaults are Correlated



Lecture Slides

  Bankruptcy probabilities
  Default risk pricing
  Default correlation