Jarrow Turnbull Model

DEFINITION of 'Jarrow Turnbull Model'

One of the first reduced-form models for pricing credit risk. Developed by Robert Jarrow and Stuart Turnbull, the model utilizes multi-factor and dynamic analysis of interest rates to calculate the probability of default. Reduced-form models are one of two approaches to credit risk modeling, the other being structural.

BREAKING DOWN 'Jarrow Turnbull Model'

Structural models assume that the modeler - like a company's managers - has complete knowledge of its assets and liabilities, leading to a predictable default time. Reduced-form models assume that the modeler - like the market - has incomplete knowledge about the company's condition, leading to an inaccessible default time. Jarrow concludes that for pricing and hedging, reduced-form models are the preferred methodology.




RELATED TERMS
  1. Default Model

    A type of model used by financial institutions to determine the ...
  2. Multi-Factor Model

    A financial model that employs multiple factors in its computations ...
  3. Hull–White Model

    A single-factor interest model used to price derivatives. The ...
  4. Multistage Dividend Discount Model

    An equity valuation model that builds on the Gordon growth model ...
  5. Stochastic Modeling

    A method of financial modeling in which one or more variables ...
  6. Versioning

    A business practice in which a company produces different models ...
Related Articles
  1. Entrepreneurship

    Calculating (Small) Company Credit Risk

    Determining creditworthiness of smaller and medium-sized corporations isn't as easy as for larger companies, but these tips can help.
  2. Investing

    Understanding Financial Models

    A financial model is a representation of some aspects of a firm or given security. It uses historical numbers to create calculations that inform financial recommendations or predict future financial ...
  3. Professionals

    The Best Financial Modeling Courses for Investment Bankers

    Obtain information, both general and comparative, about the best available financial modeling courses for individuals pursuing a career in investment banking.
  4. Options & Futures

    How To Build Valuation Models Like Black-Scholes (BS)?

    Want to build a model like Black-Scholes? Here are the tips and guidelines for developing a framework with the example of the Black-Scholes model.
  5. Options & Futures

    Breaking Down The Binomial Model To Value An Option

    Find out how to carve your way into this valuation model niche.
  6. Fundamental Analysis

    What's the Gordon Growth Model?

    The Gordon growth model is used to calculate the intrinsic value of a stock today, based on the stock’s expected future dividends. It is widely used by investors and analysts to compare the predicted ...
  7. Fundamental Analysis

    Capital Asset Pricing Model - CAPM

    CAPM is a model that describes the relationship between risk and expected return.
  8. Trading Strategies

    Pairs Trading: Risks

    Although pure arbitrage is essentially a risk-free strategy, pairs trading (either as relative value arbitrage or StatArb) involves certain risks, including model risk and execution risk. Model ...
  9. Options & Futures

    Options Pricing: Cox-Rubenstein Binomial Option Pricing Model

    The Cox-Rubenstein (or Cox-Ross-Rubenstein) binomial option pricing model is a variation of the original Black-Scholes option pricing model. It was first proposed in 1979 by financial economists/engineers ...
  10. Investing

    Predictive Analytics Drives Return for Investors

    A new industry of predictive analysis has developed to make sense of big data and give investors real-time buy and sell recommendations based on the patterns forming in the data long before traditional ...
RELATED FAQS
  1. What is the difference between financial forecasting and financial modelling?

    Understand the difference between financial forecasting and financial modeling, and learn why a company should conduct both ... Read Answer >>
  2. Are perfect competition models in economics useful?

    Take a look at some of the arguments made by the proponents and critics of the theory of perfect competition in contemporary ... Read Answer >>
  3. How do subscription business models work?

    Understand how a subscription business model works and why companies prefer a subscription business model over a traditional ... Read Answer >>
  4. Why are microeconomic models different in the short run than the long run

    Find out why short-run and long-run microeconomic models treat production, costs and variable change using different given ... Read Answer >>
  5. What is the difference between work in progress and work in process?

    Learn how financial institutions can use Bayesian analysis to model credit default risk, and understand how derivatives have ... Read Answer >>
  6. What technical skills must one possess to trade options?

    Learn about the technical skills required to trade options and how mathematical and computer science skills give you a better ... Read Answer >>
Hot Definitions
  1. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  2. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  3. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  4. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  5. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  6. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
Trading Center