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Default estimation for low-default portfolios

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  • Kiefer, Nicholas M.

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.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 16 (2009)
Issue (Month): 1 (January)
Pages: 164-173

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Handle: RePEc:eee:empfin:v:16:y:2009:i:1:p:164-173

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Web page: http://www.elsevier.com/locate/jempfin

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Keywords: Bayesian inference Bayesian estimation Expert information Basel II Risk management;

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  1. Giesecke, Kay & Weber, Stefan, 2004. "Cyclical correlations, credit contagion, and portfolio losses," Journal of Banking & Finance, Elsevier, vol. 28(12), pages 3009-3036, December.
  2. Stefan Weber & Kay Giesecke, 2003. "Credit Contagion and Aggregate Losses," Computing in Economics and Finance 2003 246, Society for Computational Economics.
  3. Garthwaite, Paul H. & Kadane, Joseph B. & O'Hagan, Anthony, 2005. "Statistical Methods for Eliciting Probability Distributions," Journal of the American Statistical Association, American Statistical Association, vol. 100, pages 680-701, June.
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Cited by:
  1. Orth, Walter, 2011. "Default probability estimation in small samples - with an application to sovereign bonds," MPRA Paper 33778, University Library of Munich, Germany.
  2. Yi-Ping Chang & Chih-Tun Yu, 2014. "Bayesian confidence intervals for probability of default and asset correlation of portfolio credit risk," Computational Statistics, Springer, vol. 29(1), pages 331-361, February.
  3. Dirk Tasche, 2011. "Bayesian estimation of probabilities of default for low default portfolios," Papers 1112.5550, arXiv.org, revised Aug 2013.
  4. Orth, Walter, 2011. "Default probability estimation in small samples: With an application to sovereign bonds," Discussion Papers in Statistics and Econometrics 5/11, University of Cologne, Department for Economic and Social Statistics.

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