Default probability estimation in small samples - with an application to sovereign bonds
AbstractIn small samples and especially in the case of small true default probabilities, standard approaches to credit default probability estimation have certain drawbacks. Most importantly, standard estimators tend to underestimate the true default probability which is of course an undesirable property from the perspective of prudent risk management. As an alternative, we present an empirical Bayes approach to default probability estimation and apply the estimator to a comprehensive sample of Standard & Poor's rated sovereign bonds. We further investigate the properties of a standard estimator and the empirical Bayes estimator by means of a simulation study. We show that the empirical Bayes estimator is more conservative and more precise under realistic data generating processes.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 33778.
Date of creation: 28 Sep 2011
Date of revision:
Low-default portfolios; empirical Bayes; sovereign default risk; Basel II;
Find related papers by JEL classification:
- C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-10-09 (All new papers)
- NEP-ECM-2011-10-09 (Econometrics)
- NEP-RMG-2011-10-09 (Risk Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Elena Kalotychou & Ana-Maria Fuertes, 2006.
"On Sovereign Credit Migration: A Study of Alternative Estimators and Rating Dynamics,"
Computing in Economics and Finance 2006
509, Society for Computational Economics.
- Fuertes, Ana-Maria & Kalotychou, Elena, 2007. "On sovereign credit migration: A study of alternative estimators and rating dynamics," Computational Statistics & Data Analysis, Elsevier, vol. 51(7), pages 3448-3469, April.
- Kiefer, Nicholas M., 2010. "Default Estimation and Expert Information," Journal of Business & Economic Statistics, American Statistical Association, vol. 28(2), pages 320-328.
- Kiefer, Nicholas M., 2009.
"Default estimation for low-default portfolios,"
Journal of Empirical Finance,
Elsevier, vol. 16(1), pages 164-173, January.
- Lando, David & Skodeberg, Torben M., 2002. "Analyzing rating transitions and rating drift with continuous observations," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 423-444, March.
- Christensen, Jens H.E. & Hansen, Ernst & Lando, David, 2004. "Confidence sets for continuous-time rating transition probabilities," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2575-2602, November.
- Hanson, Samuel & Schuermann, Til, 2006. "Confidence intervals for probabilities of default," Journal of Banking & Finance, Elsevier, vol. 30(8), pages 2281-2301, August.
- Altman, Edward I, 1989. " Measuring Corporate Bond Mortality and Performance," Journal of Finance, American Finance Association, vol. 44(4), pages 909-22, September.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If references are entirely missing, you can add them using this form.