I’m trying to calibrate a simple credit curve with flat spread and recovery rate by following the example in FastCreditCurveCalibratorTest. Sample code in github
I expected the results to be very close to those produced by the formula PD = exp{-S*t / (1 - RR)}, however, while small, the differences are noticeable. I get the following result for a 5yr curve, probing for probability of default every 3 months:
Strata Formula Difference
0.98519 0.98311 0.00208
0.97055 0.96650 0.00405
0.95613 0.95053 0.00561
0.94179 0.93464 0.00715
0.92754 0.91885 0.00869
0.91339 0.90333 0.01006
0.89960 0.88824 0.01136
0.88600 0.87339 0.01261
0.87244 0.85864 0.01380
0.85911 0.84413 0.01498
0.84626 0.83018 0.01608
0.83345 0.81631 0.01714
0.82067 0.80252 0.01815
0.80811 0.78896 0.01915
0.79598 0.77592 0.02006
0.78391 0.76296 0.02096
0.77191 0.75007 0.02184
0.76008 0.73740 0.02268
0.74866 0.72521 0.02345
0.73729 0.71309 0.02420
Is there anything I’m missing?
An observation I made:
If I change the probing frequency from 3M to 1M the third survival probability should equal the first one with the 3M probing but it does not with strata.