Default estimation for low-default portfolios

Nicholas M. Kiefer

Journal of Empirical Finance, 2009, vol. 16, issue 1, pages 164-173

Abstract: Risk managers at financial institutions are concerned with estimating default probabilities for asset groups both for internal risk control procedures and for regulatory compliance. Low-default assets pose an estimation problem that has attracted recent concern. The problem in default probability estimation for low-default portfolios is that there is little relevant historical data information. No amount of data data-processing can fix this problem. More information is required. Incorporating expert opinion formally is an attractive option. The probability (Bayesian) approach is proposed, its feasibility demonstrated, and its relation to supervisory requirements discussed.

Keywords: Bayesian; inference; Bayesian; estimation; Expert; information; Basel; II; Risk; management (search for similar items in EconPapers)
Date: 2009

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Persistent link: http://EconPapers.repec.org/RePEc:eee:empfin:v:16:y:2009:i:1:p:164-173

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Journal of Empirical Finance is edited by R. T. Baillie, G. Bekaert, W. Ferson, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff

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