Stabilising Lifetime PD Models under Forecast Uncertainty

Vahab Rostampour

Papers from arXiv.org

Abstract: Estimating lifetime probabilities of default (PDs) under IFRS~9 and CECL requires projecting point--in--time transition matrices over multiple years. A persistent weakness is that macroeconomic forecast errors compound across horizons, producing unstable and volatile PD term structures. This paper reformulates the problem in a state--space framework and shows that a direct Kalman filter leaves non--vanishing variability. We then introduce an anchored observation model, which incorporates a neutral long--run economic state into the filter. The resulting error dynamics exhibit asymptotic stochastic stability, ensuring convergence in probability of the lifetime PD term structure. Simulation on a synthetic corporate portfolio confirms that anchoring reduces forecast noise and delivers smoother, more interpretable projections.

Date: 2025-09, Revised 2025-09
New Economics Papers: this item is included in nep-cmp
References: Add references at CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/2509.10586 Latest version (application/pdf)

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:arx:papers:2509.10586

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().