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Corporate Credit Risk Modeling: Quantitative Rating System And Probability Of Default Estimation

Author

Listed:
  • João Fernandes

    (Banco BPI)

Abstract

The literature on corporate credit risk modeling for privately-held firms is scarce. Although firms with unlisted equity or debt represent a significant fraction of the corporate sector worldwide, research in this area has been hampered by the unavailability of public data. This study is an empirical application of credit scoring and rating techniques applied to the corporate historical database of one of the major Portuguese banks. Several alternative scoring methodologies are presented, thoroughly validated and statistically compared. In addition, two distinct strategies for grouping the individual scores into rating classes are developed. Finally, the regulatory capital requirements under the New Basel Capital Accord are calculated for a simulated portfolio, and compared to the capital requirements under the current capital accord.

Suggested Citation

  • João Fernandes, 2005. "Corporate Credit Risk Modeling: Quantitative Rating System And Probability Of Default Estimation," Finance 0505013, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpfi:0505013
    Note: Type of Document - pdf; pages: 70
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/fin/papers/0505/0505013.pdf
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    References listed on IDEAS

    as
    1. Crouhy, Michel & Galai, Dan & Mark, Robert, 2001. "Prototype risk rating system," Journal of Banking & Finance, Elsevier, vol. 25(1), pages 47-95, January.
    2. Jacobson, Tor & Roszbach, Kasper, 2003. "Bank lending policy, credit scoring and value-at-risk," Journal of Banking & Finance, Elsevier, vol. 27(4), pages 615-633, April.
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    5. Duffie, Darrell & Singleton, Kenneth J, 1997. " An Econometric Model of the Term Structure of Interest-Rate Swap Yields," Journal of Finance, American Finance Association, vol. 52(4), pages 1287-1321, September.
    6. Robert A. Jarrow & Stuart M. Turnbull, 2008. "Pricing Derivatives on Financial Securities Subject to Credit Risk," World Scientific Book Chapters,in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 17, pages 377-409 World Scientific Publishing Co. Pte. Ltd..
    7. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    8. Glenn Milligan & Martha Cooper, 1985. "An examination of procedures for determining the number of clusters in a data set," Psychometrika, Springer;The Psychometric Society, vol. 50(2), pages 159-179, June.
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    10. Engelmann, Bernd & Hayden, Evelyn & Tasche, Dirk, 2003. "Measuring the Discriminative Power of Rating Systems," Discussion Paper Series 2: Banking and Financial Studies 2003,01, Deutsche Bundesbank.
    11. Barniv, Ran & McDonald, James B, 1999. "Review of Categorical Models for Classification Issues in Accounting and Finance," Review of Quantitative Finance and Accounting, Springer, vol. 13(1), pages 39-62, July.
    12. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    13. Boyes, William J. & Hoffman, Dennis L. & Low, Stuart A., 1989. "An econometric analysis of the bank credit scoring problem," Journal of Econometrics, Elsevier, vol. 40(1), pages 3-14, January.
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    Cited by:

    1. repec:bpj:strimo:v:34:y:2017:i:1-2:p:55-67:n:1 is not listed on IDEAS
    2. Jakubik, Petr & Moinescu, Bogdan, 2015. "Assessing optimal credit growth for an emerging banking system," Economic Systems, Elsevier, vol. 39(4), pages 577-591.
    3. Dagmar Čámská, 2016. "Development tendencies of prediction models with an emphasis on Central Europe," Ekonomika a Management, University of Economics, Prague, vol. 2016(4).
    4. Van Laere, Elisabeth & Baesens, Bart, 2010. "The development of a simple and intuitive rating system under Solvency II," Insurance: Mathematics and Economics, Elsevier, vol. 46(3), pages 500-510, June.
    5. Mariusz Górajski & Dobromił Serwa & Zuzanna Wośko, 2016. "Measuring expected time to default under stress conditions for corporate loans," NBP Working Papers 237, Narodowy Bank Polski, Economic Research Department.

    More about this item

    Keywords

    Credit Scoring; Credit Rating; Private Firms; Discriminatory Power; Basel Capital Accord; Capital Requirements;

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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