Calibrating low-default portfolios, using the cumulative accuracy profile

Marco J. van der Burgt

Abstract

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.