In the present paper we use a model to forecast default probabilities and estimate default correlations based on the threshold model described above. The default probability measures the probability of an obligor’s assets falling short of a threshold. In addition, asset correlations are modeled as a measure of co-movement of the asset values of two obligors. Default correlations can then be derived analytically. Our approach differs from existing studies on forecasting default probabilities (such as Escott/ Glormann/ Kocagil [2001], Falkenstein [2000] and Shumway [2001]) and estimating default correlations (like Dietsch/ Petey [2002], Gupton/Finger/Bhatia [1997] and Lucas [1995]) in several ways and therefore leads to new important results. .
