Financially motivated model performance measures

Craig Friedman, Sven Sandow

Abstract

ABSTRACT

In this article we discuss performance measures for probabilistic models, with particular emphasis on credit risk models, from the perspective of a financial market participant who would use such models to make investment decisions. We state conditions under which these performance measures essentially reduce to the likelihood, which is familiar from statistics and can be readily computed. We also discuss other popular performance measures for default probability models and the limitations of these measures.