Calculation of default probability (PD) solving merton model PDEs on sparse grids

Abstract

Actual developements of the sub-prime crisis of 2008 have put a strong focus on the importance of credit default models. The Merton Model is one of these models, using partial differential equations to calculate the probability of default (PD) for a correlated credit portfolio. The resulting equations are discretized on structured sparse grids through the method of Finite-Differences and numerically solved using the software package SG2. Parallel Computing is used to speed up the calculations. © 2009 IEEE.