Analyzing Default Probabilities of U.S. Corporations, 1963-2002

New York, October 29, 2002

The New Capital Accord proposed by the Basel Committee on Banking Supervision recognizes the need for credit model testing and performance evaluation. David Shimko, President of Risk Capital Manager and Harvard Business School, will serve as moderator. Kamakura's Managing Director of Research Robert A. Jarrow and President Donald R. van Deventer present important new Kamakura Corporation research results on default probabilities for U.S. Corporations in this invitation only conference. Professor Jarrow and Dr. van Deventer will discuss the historical performance of both structural and reduced form credit models using a historical data set with more than 1.9 million observations. Professor Jarrow and Dr. van Deventer will discuss the practical use of reduced form and structural model default probabilities in the daily management and hedging of loan, derivatives and securities portfolios.
Conference Agenda

- A Review of 40 Years of Default Probability Data
- Key Drivers of Corporate Default in the United States
- A Brief Review of Structural and Reduced Form Credit Model Approaches
- Reduced Form Models: Theoretical Background
- Empirical vs. Risk Neutral Default Probabilities: How Do They Differ?
- Results of Fitting Models to 40 Years of U.S. Data
- Does Accounting Data Improve Equity Based Default Probability Estimation?
- Accuracy Ratios for Major Model Classes
- Valuation, Hedging and Pricing Using Reduced Form and Structural Credit

Models:
1.Loans
2.Credit Derivatives
3. CDOs
4. Basket Credit Insurance

- A Summary of the Implications for Basel II

Robert A. Jarrow, Managing Director,was named Managing Director and Director of Research of the Kamakura Corporation in February 1995. He is Ronald and Susan Lynch Professor of Investment Management at Cornell University's S.C. Johnson Graduate School of Management where he has been a professor since 1979.
The International Association of Financial Engineers (IAFE) named Professor Jarrow Financial Engineer of the Year in 1997. Dr. Jarrow is a senior fellow of the IAFE and serves on the board of directors of the American Finance Association. Professor Jarrow was an interim director of the Global Association of Risk Professionals in 2002. As one of the world's foremost authorities on credit risk, bond market dynamics and foreign exchange, Dr. Jarrow is an originator of the Heath-Jarrow-Morton multi-factor term structure model, and the author of four books and more than eighty research articles on financial theory and investment management. His book, Modeling Fixed Income Securities and Interest Rate Options, was published in 1997. Professor Jarrow's text with Stuart Turnbull Derivative Securities was published in 1997. Both books are in their second editions.

Dr. Jarrow received an A.B. in Mathematics and Management Science from Duke University, his M. B. A. in Finance from the Amos Tuck School of Business at Dartmouth College, and his Ph. D. in Finance with a minor in Economics from Massachusetts Institute of Technology.

Donald R. van Deventer, President (Honolulu), founded the Kamakura Corporation in April, 1990 and is currently President. Dr. van Deventer's book Financial Risk Management in Banking (with Dr. Dennis Uyemura, Probus Publishing, 1993) is one of the best known books in its field. His newest book (with Kenji Imai) is entitled Financial Risk Analytics: A Term Structure Model Approach for Banking, Insurance, and Investment Management (Irwin, November 1996). Dr. van Deventer was named an appointed director of the Japanese Association for Financial Econometrics and Engineering in July, 2001 and he served as an interim director of the Global Association of Risk Professionals in 2002. He has served on the alumni council of the Harvard Graduate School of Arts and Sciences since 1999 and was named one of two GSAS representatives to the Harvard Alumni Association in 2002.

Dr. van Deventer served as adjunct professor at the Hitotsubashi University Graduate School of International Corporate Strategy in 2002. Dr. van Deventer was senior vice president in the investment banking department of Lehman Brothers (then Shearson Lehman Hutton) from 1987 to 1990. From 1982 to 1987, Dr. van Deventer was the treasurer for First Interstate Bancorp in Los Angeles. Dr. van Deventer was a Vice President in the risk management department of Security Pacific National Bank from 1977 to 1982. Dr. van Deventer holds a Ph.D. in Business Economics, a joint degree of the Harvard University Department of Economics and the Harvard Graduate School of Business Administration.

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