Expected Default Frequency (EDF)
Corporate Credit Analysis glossary · Corporate Credit Analysis
Definition
Moody's Analytics' output of the Merton structural model, representing a point-in-time PD estimate based on equity-implied asset values and volatilities.
Expected Default Frequency (EDF) in plain English
Expected Default Frequency (EDF) is a number, made by the firm Moody's Analytics, that estimates the chance a company fails to pay its debts over the next year — its 'probability of default' (PD). The clever trick: instead of only reading the company's own financial statements, it watches the company's STOCK price, because millions of investors trading that stock are constantly betting on how healthy the firm really is. When the stock gets cheap and jumpy (volatile), the model reads that as 'investors think this company's assets are shrinking toward the danger zone,' and the EDF rises. It's 'point-in-time,' meaning it reflects conditions RIGHT NOW, not a long-run average.
Also called: EDF
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