"The Kamakura troubled company index and Kamakuraâs related company-by-company default probabilities give market participants an ability to distinguish clearly between pure default risk and credit spreads, which reflect market risk aversion in general and macro-economic conditions," said Warren Sherman, Kamakura President and Chief Operating Officer. "The sharp increase in credit spreads over the last two weeks of course reflects an increase in housing-related default probabilities, but the wide-spread nature of the movement in spreads also reflects a sharp increase in the marketâs aversion to risk. Short term credit risk, which is what the troubled company index measures, has risen in the lower default probability ranges, but so far there has not been dramatic movement at the highest risk levels from a default probability perspective.
The percentage of the global corporate universe with default probabilities between 1% and 5% increased sharply from 4.7% of the universe at the end of July to 5.5% of the universe on August 16. The percentage of companies with default probabilities between 5% and 10% was up by 0.1% to 1.0% of the universe on August 16. The percentage of the universe with default probabilities between 10 and 20% was unchanged at 0.6% of the universe. The percentage of companies with default probabilities over 20% increased by 0.1% to 0.4% of the total universe as of August 16. The index has not been higher than 7.4% for a full quarter since the second quarter of 2005."
Beginning in January 2006, Kamakura has moved to a global index covering 29 countries using the annualized one month default probability produced by the best performing credit model of the Kamakura Risk Information Services default and correlation service. The model used is the fourth generation Jarrow-Chava reduced form default probability, a formula that bases default predictions on a sophisticated combination of financial ratios, stock price history, and macro-economic factors. The countries currently covered by the index include Australia, Austria, Belgium, Brazil, Canada, Denmark, Finland, France, Germany, Hong Kong, India, Ireland, Israel, Italy, Japan, Luxemburg, Malaysia, the Netherlands, New Zealand, Norway, Singapore, South Africa, South Korea, Spain, Sweden, Switzerland, Taiwan, United Kingdom, and the United States.