Measuring the Discriminative Power of Rating Systems
AbstractAssessing the discriminative power of rating systems is an important question to banks and to regulators. In this article we analyze the Cumulative Accuracy Profile (CAP) and the Receiver Operating Characteristic (ROC) which are both commonly used in practice. We give a test-theoretic interpretation for the concavity of the CAP and the ROC curve and demonstrate how this observation can be used for more efficiently exploiting the informational contents of accounting ratios. Furthermore, we show that two popular summary statistics of these concepts, namely the Accuracy Ratio and the area under the ROC curve, contain the same information and we analyse the statistical properties of these measures. We show in detail how to identify accounting ratios with high discriminative power, how to calculate confidence intervals for the area below the ROC curve, and how to test if two rating models validated on the same data set are different. All concepts are illustrated by applications to real data. --
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 Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 2: Banking and Financial Studies with number 2003,01.
Date of creation: 2003
Date of revision:
Validation; Rating Models; Credit Analysis;
Find related papers by JEL classification:
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
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.:
- Dirk Tasche, 2002. "Remarks on the monotonicity of default probabilities," Papers cond-mat/0207555, arXiv.org.
- Dierkes, Maik & Erner, Carsten & Langer, Thomas & Norden, Lars, 2013. "Business credit information sharing and default risk of private firms," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(8), pages 2867-2878.
- Rafael Repullo & JesÃºs Saurina & Carlos Trucharte, 2010.
"Mitigating the pro-cyclicality of Basel II,"
Banco de Espaï¿½a Working Papers
1028, Banco de Espaï¿½a.
- Rafael Repullo & JesÃºs Saurina & Carlos Trucharte, 2009. "Mitigating The Procyclicality Of Basel Ii," Working Papers, CEMFI wp2009_0903, CEMFI.
- Repullo, Rafael & Saurina, JesÃºs & Trucharte, Carlos, 2009. "Mitigating the Procyclicality of Basel II," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7382, C.E.P.R. Discussion Papers.
- Radu Muntean, 2009. "Early Warning Models for Banking Supervision in Romania," Advances in Economic and Financial Research - DOFIN Working Paper Series, Bucharest University of Economics, Center for Advanced Research in Finance and Banking - CARFIB 39, Bucharest University of Economics, Center for Advanced Research in Finance and Banking - CARFIB.
- JoÃ£o Fernandes, 2005. "Corporate Credit Risk Modeling: Quantitative Rating System And Probability Of Default Estimation," Finance, EconWPA 0505013, EconWPA.
- Laura Auria & Rouslan A. Moro, 2008. "Support Vector Machines (SVM) as a Technique for Solvency Analysis," Discussion Papers of DIW Berlin 811, DIW Berlin, German Institute for Economic Research.
- Alexandros Benos & George Papanastasopoulos, 2005. "Extending the Merton Model: A Hybrid Approach to Assessing Credit Quality," Finance, EconWPA 0505020, EconWPA, revised 03 Jun 2005.
- Rodriguez, Adolfo & Trucharte, Carlos, 2007. "Loss coverage and stress testing mortgage portfolios: A non-parametric approach," Journal of Financial Stability, Elsevier, Elsevier, vol. 3(4), pages 342-367, December.
- Zvika Afik & Ohad Arad & Koresh Galil, 2012. "Using Merton model: an empirical assessment of alternatives," Working Papers, Ben-Gurion University of the Negev, Department of Economics 1202, Ben-Gurion University of the Negev, Department of Economics.
- Edward Altman & Gabriele Sabato, 2005. "Effects of the New Basel Capital Accord on Bank Capital Requirements for SMEs," Journal of Financial Services Research, Springer, Springer, vol. 28(1), pages 15-42, October.
- En-Der Su & Shih-Ming Huang, 2010. "Comparing Firm Failure Predictions Between Logit, KMV, and ZPP Models: Evidence from Taiwanâ€™s Electronics Industry," Asia-Pacific Financial Markets, Springer, Springer, vol. 17(3), pages 209-239, September.
- Martin Rezac & Frantisek Rezac, 2011. "How to Measure the Quality of Credit Scoring Models," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, Charles University Prague, Faculty of Social Sciences, vol. 61(5), pages 486-507, November.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics).
If references are entirely missing, you can add them using this form.