Proposal of New Hybrid PD Estimation Models for the Low Default Portfolios (LDPs), Empirical Comparisons and Policy Implications

Rungporn Roengpitya
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Rungporn Roengpitya: Bank of Thailand

No 2012-03, Working Papers from Monetary Policy Group, Bank of Thailand

Abstract: I proposed the new group of hybrid models to be used for the probability of default (PD) estimation on low default portfolios (LDPs). The construction of this hybrid model class was based upon the two existing estimation approaches–the most prudent estimation of Pluto and Tasche (2006) and Forrest (2005)’s maximum likelihood method. These new hybrid models possess the robust framework from the maximum likelihood concept but, unlike the original likelihood approach, the PD computation is much less intensive for rating models with many rating grades. Moreover, I found that the proposed hybrid models yield more conservative PDs than the existing LDP models, provided that the observed default rates satisfied specific conditions outlined in this paper. In addition to the theoretical construction of the models, this paper also gives the mathematical proofs of the necessary and sufficient conditions to ensure rank ordering of PD estimates from the hybrid models as well as the proofs of the conditions needed to guarantee the conservatism of the hybrid PDs when compared to other estimation method.

Keywords: Proposal; of; New; Hybrid; PD; Estimation; Models (search for similar items in EconPapers)
Pages: 38 pages
Date: 2012-03
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