Credit Risk Models - Do They Deliver Their Promises? A Quantitative Assessment
AbstractWe develop a framework to assess the statistical significance of expected default frequency as calculated by credit risk models. This framework is then used to analyze the quality of two commercially available models that have become popular among practitioners: KMV Credit Monitor and RiskCalc from Moody's. Using a unique database of expected default probability from both vendors, we study both the consistency of predictions and their timeliness. We introduce the concept of cumulative accuracy profile (CAP), which allows to see in one curve the percentage of companies whose defualts were captured by the models one year in advance. We also use the Miller's information test to see if the models add information to the S&P rating. The result of the analysis indicates that these models indeed add relevant information not accounted for by rating alone. Moreover, with respect to rating agencies, the models predict defaults more than ten months in advance on average.
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Bibliographic InfoPaper provided by EconWPA in its series Risk and Insurance with number 0306003.
Length: 18 pages
Date of creation: 19 Jun 2003
Date of revision:
Note: Type of Document - Acrobat PDF; prepared on IBM PC; to print on HP A4; pages: 18 ; figures: included
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credit risk models; cumulative accuracy profile; risk modeling;
Other versions of this item:
- Gianluca Oderda & Michel M. Dacorogna & Tobias Jung, 2003. "Credit Risk Models - Do They Deliver Their Promises? A Quantitative Assessment," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 32(2), pages 177-195, 07.
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-06-25 (All new papers)
- NEP-CFN-2003-06-25 (Corporate Finance)
- NEP-CMP-2003-06-25 (Computational Economics)
- NEP-FIN-2003-06-25 (Finance)
- NEP-MAC-2003-06-25 (Macroeconomics)
- NEP-RMG-2003-06-25 (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.:
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