Estimating implied corporate default probabilities from bond prices

In this paper we investigate a reduced-form model for dynamically estimating the risk-neutral default probability distribution of a set of US corporations using the constantly changing information in the corporate bond market. The strength of this approach lies in its simplicity and reliance on market sentiment embedded in the bond prices, and does not rely on stale and sometimes inaccurate accounting information. This reduced-form model approach of estimating implied creditworthiness of firms has the advantage over traditional credit ratings