Using Model Performance to Assess the Representativeness of Data for Model Development and Calibration in Financial Institutions

Chamay Kruger, Willem Daniel Schutte and Tanja Verster
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Chamay Kruger: Centre for Business Mathematics and Informatics, North-West University, Potchefstroom 2531, South Africa
Willem Daniel Schutte: Centre for Business Mathematics and Informatics, North-West University, Potchefstroom 2531, South Africa
Tanja Verster: Centre for Business Mathematics and Informatics, North-West University, Potchefstroom 2531, South Africa

Risks, 2021, vol. 9, issue 11, 1-26

Abstract: This paper proposes a methodology that utilises model performance as a metric to assess the representativeness of external or pooled data when it is used by banks in regulatory model development and calibration. There is currently no formal methodology to assess representativeness. The paper provides a review of existing regulatory literature on the requirements of assessing representativeness and emphasises that both qualitative and quantitative aspects need to be considered. We present a novel methodology and apply it to two case studies. We compared our methodology with the Multivariate Prediction Accuracy Index. The first case study investigates whether a pooled data source from Global Credit Data (GCD) is representative when considering the enrichment of internal data with pooled data in the development of a regulatory loss given default (LGD) model. The second case study differs from the first by illustrating which other countries in the pooled data set could be representative when enriching internal data during the development of a LGD model. Using these case studies as examples, our proposed methodology provides users with a generalised framework to identify subsets of the external data that are representative of their Country’s or bank’s data, making the results general and universally applicable.

Keywords: representativeness; regulation; LGD; model performance; Global Credit Data (GCD); pooled data (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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