Estimating the probability of default for no‐default and low‐default portfolios

Oliver Blümke

Journal of the Royal Statistical Society Series C, 2020, vol. 69, issue 1, 89-107

Abstract: The paper proposes a sequential Bayesian updating approach to estimate default probabilities on rating grade level for no‐ and low‐default portfolios. Bayesian sequential updating enables default probabilities to be obtained also for those rating grades for which no defaults have been observed. The advantage of this approach is that it preserves the rank order of rating grades in the case of no defaults. Rank preservation is not ensured when using an identical prior distribution across all rating grades. We discuss Bayesian sequential updating for the beta–binomial model and a model incorporating the asymptotic single‐risk factor model of the Basel Accord. Practical aspects such as incorporating information from external sources and the margin of conservatism are addressed.

Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1111/rssc.12381

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:jorssc:v:69:y:2020:i:1:p:89-107

Ordering information: This journal article can be ordered from
http://ordering.onli ... 1111/(ISSN)1467-9876

Access Statistics for this article

Journal of the Royal Statistical Society Series C is currently edited by R. Chandler and P. W. F. Smith

More articles in Journal of the Royal Statistical Society Series C from Royal Statistical Society Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().