Default probability estimation in small samples - with an application to sovereign bonds
In 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.
|Date of creation:||28 Sep 2011|
|Date of revision:|
|Contact details of provider:|| Postal: Ludwigstraße 33, D-80539 Munich, Germany|
Web page: https://mpra.ub.uni-muenchen.de
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.:
- 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.
- 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.
- Kiefer, Nicholas M., 2009.
"Default estimation for low-default portfolios,"
Journal of Empirical Finance,
Elsevier, vol. 16(1), pages 164-173, January.
- Kiefer, Nicholas M., 2010. "Default Estimation and Expert Information," Journal of Business & Economic Statistics, American Statistical Association, vol. 28(2), pages 320-328.
- Hanson, Samuel & Schuermann, Til, 2006. "Confidence intervals for probabilities of default," Journal of Banking & Finance, Elsevier, vol. 30(8), pages 2281-2301, August.
- 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.
- Altman, Edward I, 1989. " Measuring Corporate Bond Mortality and Performance," Journal of Finance, American Finance Association, vol. 44(4), pages 909-22, September.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:33778. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter)
If references are entirely missing, you can add them using this form.