Simulating Probability of Default
Overview
Default is a zero-one event. That is, default either happens or it doesnt. Given this simple framework, simulating
default requires simulating a 1 with a given probability and a zero otherwise.
However, some models (mixture models) take the probability itself as being a random variable.
This can occur if the probability of default changes over time or with the economy.
Default Distribution
There are generally two distributions that are used to simulate default.
