Thinking positively

How does one produce positive probability of default estimates if there are no default observations? Katja Pluto and Dirk Tasche propose a statistically based methodology to derive non-zero probabilities of default for credit portfolios with none or very few observed defaults. Their most-prudent estimation principle delivers results for any desired degree of conservatism, and can be applied to both uncorrelated and correlated default events. The estimates could serve as a basis for bank internal credit risk management and regulatory purposes alike

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