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. Model Risk

    A type of risk that occurs when a financial model used to measure ...
  2. Default Model

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

    A financial model that employs multiple factors in its computations ...
  4. Stochastic Modeling

    A method of financial modeling in which one or more variables ...
  5. Business Model

    The plan implemented by a company to generate revenue and make ...
  6. Hull–White Model

    A single-factor interest model used to price derivatives. The ...
Related Articles
  1. Investing

    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

    What is a Business Model?

    Business model is the term for a company’s plan as to how it will earn revenue.
  3. Trading

    Build a Profitable Trading Model In 7 Easy Steps

    Trading models can provide a powerful tool for building profit. Traders can use and customize existing trading models or build an original model. This article provides seven steps to building ...
  4. 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 ...
  5. Markets

    Getting To Know Business Models

    Learning how to assess business models helps investors identify companies that are the best investments.
  6. Markets

    How Do Professionals Forecast Crude Oil Prices?

    Discover how the future price of oil is predicted with a weighted combination of mathematical tools. Economists largely use five main models as their base.
  7. Trading

    The Fed Model And Stock Valuation: What It Does And Does Not Tell Us

    Learn about this popular stock market valuation model and how accurate it has been over the years.
  8. Investing

    DCF Vs. Comparables: Which One To Use

    DCF and Comparables models are widely used in equity valuation. We explain the pros and cons of each method.
  9. Managing Wealth

    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.
  10. Trading

    How To Build A Forex Trading Model

    The forex market is volatile, but a forex trading model with clear, step-by-step rules based on a sound strategy can help decrease losing trades.
RELATED FAQS
  1. What is the average return on equity for a company in the electronics sector?

    Learn about the Black-Scholes option pricing model and the binomial options model, and understand the advantages of the binomial ... Read Answer >>
  2. 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 >>
  3. What are some examples of different types of business models in major industries?

    Learn what types of business models are currently being used in the marketplace as well as examples of models that work for ... Read Answer >>
  4. What is the point of developing a business model?

    Learn some of the benefits of developing a business model and how business models are used. Consider an example of business ... Read Answer >>
  5. What do you need to know to create a business model?

    Learn what a business model is, its importance and the primary elements that are needed in order to create a successful business ... Read Answer >>
  6. What are some examples of different corporate governance systems across the world?

    Read about the three major types of corporate governance systems: the Japanese model, the Anglo-Saxon model and the continental ... Read Answer >>
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center