# Jarrow Turnbull Model

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Jarrow Turnbull Model

What is Jarrow Turnbull Model?

The Jarrow Turnbull model can be defined as the first reduced form model for pricing credit risk. Introduced by Robert Jarrow and Stuart Turnbull in the early 1990s, the model uses different factor and dynamic study of interest rates in order to calculate the tendency of default in credits. The model is a credit risk model used to assess the probability of defaults on borrowings through analysis of interest rates.

Understanding Jarrow Turnbull Model

The model developed in the 1990s, introduced a new technique to measure the probability of default through considering the impact of variable interest rates, or else known as the cost of borrowing. Usually, the pricing credit risk models are based on the assumption that the managers of firms and others having some knowledge about the market or firm’s structure make default times foresee quite easy. The Jarrow Turnbull model is based on the assumption that the managers of firms and others (modelers) are fully informed about their assets and liabilities and for that reason they can predict default.

The model is an addition of Merton model which was introduced in 1976. An individual may need experience to estimate and calculate credit risk or probability of default on credit because it is a monotonous task involves complex math and high-octane computing, so it is better to be handled by an analyst or expert.

There are several models to help analyst and financial institutions have a better control on whether a company may not be able to meet its financial obligations, or it is. Earlier, it was so usual to use gauge that estimate or examine default risk mostly by seeing at a firm’s capital structure.

Generally in the structural model, a modeler (any person from a firm who has full information about the firm’s assets and liabilities) would help in predicting the market in the future. In reduced-form models the modeler would not have any information about the firm’s liabilities and assets.

Under the Jarrow Turnbull model, the interest rates are used to analyze credit pricing. The model is considered as a very valuable model that indicates the performances of credit investments with different rates of interest, where interest is fluctuating figure. The Jarrow Turnbull model is used by a lender as a tool for its strategies in risk management.