Multi-period PD Calibration Framework for LDP Portfolios

Denis Surzhko

Journal of Applied Finance & Banking, 2015, vol. 5, issue 5, 3

Abstract: The intention of this paper is to propose PD calibration framework for low default portfolios (LDP) that allows producing smooth non-zero PD estimates for any given time horizon within the length of economic cycle. The approach produces PDs that are consistent with two main anchors – PIT and TTC PD estimates and are subject to smooth, monotonic transition between those two anchors. In practise, proposed framework could be applied to risk-based pricing of LDP portfolio deals. Moreover, according to the author opinion, the approach is generally compliant with the new IFRS 9 requirements regarding PD term-structure calibration for provisioning.

Date: 2015
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