Abstract
An extensive academic and practitioner’s literature exists on rating models development with well-structured statistical methods, however these models do not estimate PDs aligned with the economic scenario, then it is necessary a calibration. During the last years the effect of not well calibrated models has been observed on the credit market: actually they show a high level of procyclicality that let them loss market credibility and banking usability. The aim of this paper is to show a modern structured calibration approach, based on Bayesian techniques, taking into consideration specific economic factors. The calibration approach has been applied on real data of a Corporate portfolio of a top tier European Bank and a new calibration test, adjusted by the economic cycle, has been performed.
This is a preview of subscription content, log in via an institution.
Buying options
Tax calculation will be finalised at checkout
Purchases are for personal use only
Learn about institutional subscriptionsNotes
- 1.
\(k^{*}=\phi^{-1}(q)\sqrt{n\mathit{PD}(1-\mathit{PD})+n\mathit{PD}}\)
where:
q = is the confidence level of test;
PD =: is the theoretical PD of each rating grade;
n=number of observations.
References
Engelmann, B., Porath, D.: Do not forget the economy when estimating default probabilities. Willmott Mag. (2012)
Iqbal, N., Ali, A.: Estimation of Probability of Defaults (PD) for low default portfolios: an actuarial approach. In: ERM Symposium (2012)
Kiff, J., Kisser, M., Schumacher, L.: Rating through-the-cycle: what does the concept imply for rating stability and accuracy? IMF Working Paper (2013)
Konrad, M.P.: The Calibration of Rating Models. Tectum, Marburg (2012)
Tasche, D.: The art of PD curve calibration. J. Risk Manag. (2013)
van der Burgt, M.: Calibrating low-default portfolios, using the cumulative accuracy profile. J. Risk Model Valid. (2008)
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2014 Springer International Publishing Switzerland
About this chapter
Cite this chapter
Bonini, S., Caivano, G. (2014). Probability of Default: A Modern Calibration Approach. In: Perna, C., Sibillo, M. (eds) Mathematical and Statistical Methods for Actuarial Sciences and Finance. Springer, Cham. https://doi.org/10.1007/978-3-319-05014-0_9
Download citation
DOI: https://doi.org/10.1007/978-3-319-05014-0_9
Publisher Name: Springer, Cham
Print ISBN: 978-3-319-05013-3
Online ISBN: 978-3-319-05014-0
eBook Packages: Mathematics and StatisticsMathematics and Statistics (R0)