Jarrow Turnbull Model
Candlefocus EditorIn its simplest form, the Jarrow-Turnbull model measures the time it takes for a company or individual to make a payment on their debt. It then factors in additional economic conditions that can affect a borrower’s debt-servicing capabilities, such as an increase or decrease in the interest rate. The model includes an array of factors that are not usually calculated when deriving default probabilities from structural models, such as a borrower’s prior borrowing behavior, the value of collateral being used in the loan, and the possibility of bankruptcy.
The Jarrow-Turnbull model is widely used by credit risk analysts, portfolio managers, and financial institutions. Because the model takes into account both economic and financial factors, it is designed to capture both short-term and long-term fluctuations in a company’s risk profile. The model also enables experts to observe what the impact of a specific change, such as a rise or fall in the interest rate, would be on the probability of default.
The Jarrow-Turnbull model has become an important tool in the field of credit risk analysis. It provides a comprehensive and accurate measure of the risk of default associated with any given borrower. While the Jarrow-Turnbull model is widely used and is considered to be highly accurate, its capabilities are limited by the lack of precise data on the borrower’s creditworthiness. As a result, the model is more effective when used in combination with other models, such as structural models or Monte Carlo simulations.