A traffic lights approach to PD validation

Details A traffic lights approach to PD validation A traffic lights approach to PD validation

2003-05-02

arxiv.org/abs/cond-mat/0305038v1

Physics

Condensed Matter

7 pages, LaTeX with hyperref package

Scientific paper

As a consequence of the dependence experienced in loan portfolios, the standard binomial test which is based on the assumption of independence does not appear appropriate for validating probabilities of default (PDs). The model underlying the new rules for minimum capital requirements (Basle II) is taken as a point of departure for deriving two parametric test procedures that incorporate dependence effects. The first one makes use of the so-called granularity adjustment approach while the the second one is based on moment matching.

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