Forecasting Probabilities of Default and Loss Rates Given Default in the Presence of Selection
Journal of the Operational Research Society 65, 2014, 393-407
51 Pages Posted: 10 Nov 2013 Last revised: 19 Nov 2015
Date Written: May 18, 2012
Abstract
This paper offers a joint estimation approach for forecasting probabilities of default and loss rates given default in the presence of selection. The approach accommodates fixed and random risk factors. An empirical analysis identifies bond ratings, borrower characteristics and macroeconomic information as important risk factors. A portfolio-level analysisfinds evidence that common risk measurement approaches may underestimate bank capital by up to 17 per cent relative to the presented model.
Keywords: Asset Value, Correlation, Credit Portfolio, Loss Given Default, Merton Model, Probability of Default, Recovery, Tobit Model, Volatility
JEL Classification: G20, G28, C51
Suggested Citation: Suggested Citation