Journal of Credit Risk

Risk.net

A statistical modeling approach to building an expert credit risk rating system

Rasmus Waagepetersen

ABSTRACT

This paper presents an efficient method for extracting expert knowledge when building a credit risk rating system. Experts are asked to rate a sample of counterparty cases according to creditworthiness. Next, a statistical model is used to capture the relation between the characteristics of a counterparty and the expert rating. For any counterparty the model can identify the rating, which would be agreed upon by the majority of experts. Furthermore, the model can quantify the concurrence among experts. The approach is illustrated by a case study regarding the construction of an application score for retail counterparties.

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