DEFAULT MODEL

A type of model used by financial institutions to determine the likelihood of a default on credit obligations by a corporation or sovereign entity. These statistical models often use regression analysis (analyzing changes to certain market variables that are pertinent to a company's financial situation) to identify credit risk.

In most cases, when a default model is run, the result is given as the probability of default. However, other types of default models are used to predict a company's exposure-at-default and loss-given-default. These models predominantly are used by credit rating agencies such as Moody's and Standard & Poor's (S&P).