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Calibrating low-default portfolios, using the cumulative accuracy profile

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  • Marco J. van der Burgt

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ABSTRACT In the new Basel II Accord, banks are allowed to develop their own credit rating models. However, the lack of sufficient (default) data for backtesting rating models for “low-default portfolios” is a main concern for the financial industry and regulators. These low-default portfolios arecharacterized by the lack of sufficient data. In this article we present a method of calibrating low-default portfolios, based on modeling the observed power curve and deriving the calibration from this curve. The curve is determined by a concavity parameter, which can easily be related to the accuracy ratio (AR). The method is demonstrated for sovereign ratings.

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  • Marco J. van der Burgt, . "Calibrating low-default portfolios, using the cumulative accuracy profile," Journal of Risk Model Validation, Journal of Risk Model Validation.
    • Handle: RePEc:rsk:journ5:2161307
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