IDEAS home Printed from https://ideas.repec.org/p/fip/fednsr/190.html
   My bibliography  Save this paper

Estimating probabilities of default

Author

Listed:
  • Samuel Hanson
  • Til Schuermann

Abstract

We conduct a systematic comparison of confidence intervals around estimated probabilities of default (PD), using several analytical approaches from large-sample theory and bootstrapped small-sample confidence intervals. We do so for two different PD estimation methods-cohort and duration (intensity)-using twenty-two years of credit ratings data. We find that the bootstrapped intervals for the duration-based estimates are surprisingly tight when compared with the more commonly used (asymptotic) Wald interval. We find that even with these relatively tight confidence intervals, it is impossible to distinguish notch-level PDs for investment grade ratings-for example, a PDAA- from a PDA+. However, once the speculative grade barrier is crossed, we are able to distinguish quite cleanly notch-level estimated default probabilities. Conditioning on the state of the business cycle helps; it is easier to distinguish adjacent PDs in recessions than in expansions.

Suggested Citation

  • Samuel Hanson & Til Schuermann, 2004. "Estimating probabilities of default," Staff Reports 190, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:190
    as

    Download full text from publisher

    File URL: https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr190.pdf
    Download Restriction: no
    File URL: https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr190.html
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Katja Pluto & Dirk Tasche, 2006. "Estimating Probabilities of Default for Low Default Portfolios," Springer Books, in: Bernd Engelmann & Robert Rauhmeier (ed.), The Basel II Risk Parameters, chapter 0, pages 79-103, Springer.
    2. Mr. Jorge A Chan-Lau, 2006. "Fundamentals-Based Estimation of Default Probabilities - A Survey," IMF Working Papers 2006/149, International Monetary Fund.
    3. Rungporn Roengpitya & Pratabjai Nilla-or, 2012. "Challenges on the Validation of PD Models for Low Default Portfolios (LDPs) and Regulatory Policy Implications," Working Papers 2012-02, Monetary Policy Group, Bank of Thailand.
    4. Anand, Kartik & Gai, Prasanna & Kapadia, Sujit & Brennan, Simon & Willison, Matthew, 2013. "A network model of financial system resilience," Journal of Economic Behavior & Organization, Elsevier, vol. 85(C), pages 219-235.
    5. Rungporn Roengpitya, 2012. "Proposal of New Hybrid PD Estimation Models for the Low Default Portfolios (LDPs), Empirical Comparisons and Policy Implications," Working Papers 2012-03, Monetary Policy Group, Bank of Thailand.
    6. Jankowitsch, Rainer & Nagler, Florian & Subrahmanyam, Marti G., 2014. "The determinants of recovery rates in the US corporate bond market," Journal of Financial Economics, Elsevier, vol. 114(1), pages 155-177.
    7. Salnikov, V. & Mogilat, A. & Maslov, I., 2012. "Stress Testing for Russian Real Sector: First Approach," Journal of the New Economic Association, New Economic Association, vol. 16(4), pages 46-70.

    More about this item

    Keywords

    Credit; Risk; Bank loans; Credit ratings;
    All these keywords.

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fednsr:190. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Gabriella Bucciarelli (email available below). General contact details of provider: https://edirc.repec.org/data/frbnyus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.