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Credit Risk Models: Do They Deliver Their Promises?
Year Of Publication: 2002
Month Of Publication: November
Pages: 18
Download Count: 549
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Comment Num: 0
Language: EN
Source:
Who Can Read: Free
Date: 5-3-2006
Publisher: Administrator
Summary
We develop a framework to assess the statistical significance of expecteddefault frequency calculated by credit risk models. This framework is thenused to analyze the quality of two commercially available models that havebecome popular among practitioners: KMV Credit Monitor and RiskCalc fromMoody's.Using a unique database of expected default probability from both vendors,we study both the consistency of the prediction and its timeliness. We introducethe concept of cumulative accuracy profile (CAP) that allows to see in onecurve the percentage of defaulting companies captured by the models one yearin advance. We also use the Miller's information test to see if the models addinformation to the S&P rating.The result of the analysis indicates that these models indeed add relevantinformation not accounted for by rating alone. Moreover, with respect to ratingagencies, the models predict defaults more than ten months in advance onaverage.
Author(s)
Oderda, Gianluca Sign in to follow this author
Dacorogna, Michel Sign in to follow this author
Jung, Tobias Sign in to follow this author
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