Journal of Credit Risk

Risk.net

The art of probability-of-default curve calibration

Dirk Tasche

ABSTRACT

"PD curve calibration" refers to the transformation of a set of rating grade level probabilities of default (PDs) to another average PD level that is determined by a change of the underlying portfolio-wide PD. This paper presents a framework that allows us to explore a variety of calibration approaches and the conditions under which they are fit for purpose. We test the approaches discussed by applying them to publicly available data sets of agency rating and default statistics that can be considered typical for the scope of application of the approaches. We show that the popular "scaled PDs" approach is theoretically questionable and identify an alternative calibration approach ("scaled likelihood ratio") that is both theoretically sound and performs better on the test data sets.

 

 

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to Risk.net? View our subscription options

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here