Use the procedure outlined in Section 11.6.2 on p.262 of textbook and the annual percentage default...

Use the procedure outlined in Section 11.6.2 on p.262 of textbook and the annual percentage default rate for all rated companies in Table 11.6 on p.259,

a. Estimate the probability of default (PD) and default correlation (ρ) for the period 1970-1993, and for the period 1994-2016 separately.

b. Plot the probability distribution of default rate (similar to Figure 11.6 on p.263) for the time period 1970-1993 and 1994-2016 together on the same graph.

970	2.631
1971	0.286
1972	0.453
1973	0.456
1974	0.275
1975	0.361
1976	0.176
1977	0.354
1978	0.354
1979	0.088
1980	0.344
1981	0.162
1982	1.04
1983	0.9
1984	0.869
1985	0.952
1986	1.83
1987	1.423
1988	1.393
1989	2.226
1990	3.572
1991	2.803
1992	1.337
1993	0.899
1994	0.651
1995	0.899
1996	0.506
1997	0.616
1998	1.137
1999	2.123
2000	2.455
2001	3.679
2002	2.924
2003	1.828
2004	0.834
2005	0.647
2006	0.593
2007	0.349
2008	2.507
2009	4.996
2010	1.232
2011	0.906
2012	1.23
2013	1.232
2014	0.939
2015	1.732
2016	2.149

Textbook Risk Management and Financial Institutions, 5th Edition

Expert Solution

Year	Total	Probability	Year	Total	Probability
1970	2.631	0.104471	1994	0.651	0.018001	1970-1993	25.184
1971	0.286	0.011356	1995	0.899	0.024859	1994-2016	36.164
1972	0.453	0.017988	1996	0.506	0.013992
1973	0.456	0.018107	1997	0.616	0.017034	Correlation	25.184*36.164/1000
1974	0.275	0.01092	1998	1.137	0.03144		0.09
1975	0.361	0.014334	1999	2.123	0.058705
1976	0.176	0.006989	2000	2.455	0.067885
1977	0.354	0.014057	2001	3.679	0.101731
1978	0.354	0.014057	2002	2.924	0.080854
1979	0.088	0.003494	2003	1.828	0.050548
1980	0.344	0.013659	2004	0.834	0.023062
1981	0.162	0.006433	2005	0.647	0.017891
1982	1.04	0.041296	2006	0.593	0.016398
1983	0.9	0.035737	2007	0.349	0.00965
1984	0.869	0.034506	2008	2.507	0.069323
1985	0.952	0.037802	2009	4.996	0.138148
1986	1.83	0.072665	2010	1.232	0.034067
1987	1.423	0.056504	2011	0.906	0.025053
1988	1.393	0.055313	2012	1.23	0.034012
1989	2.226	0.088389	2013	1.232	0.034067
1990	3.572	0.141836	2014	0.939	0.025965
1991	2.803	0.111301	2015	1.732	0.047893
1992	1.337	0.053089	2016	2.149	0.059424
1993	0.899	0.035697	Total	36.164	1
Total	25.184	1

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