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 of Cologne, Department for Economic and Social Statistics in its series Discussion Papers in Statistics and Econometrics with number 5/11.
Date of creation: 2011
Date of revision:
Contact details of provider:
Postal: Albertus Magnus Platz, 50923 Köln
Phone: 0221 / 470 5607
Fax: 0221 / 470 5179
Web page: http://www.wisostat.uni-koeln.de/Englisch/index_en.html
More information through EDIRC
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.:
- 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.
- 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.
- 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.
- Kiefer, Nicholas M., 2009.
"Default estimation for low-default portfolios,"
Journal of Empirical Finance,
Elsevier, vol. 16(1), pages 164-173, January.
- Altman, Edward I, 1989. " Measuring Corporate Bond Mortality and Performance," Journal of Finance, American Finance Association, vol. 44(4), pages 909-22, September.
- Kiefer, Nicholas M., 2010. "Default Estimation and Expert Information," Journal of Business & Economic Statistics, American Statistical Association, vol. 28(2), pages 320-328.
- 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.
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.