Journal of Risk Model Validation

Risk.net

Wavelet analysis of business cycles for validation of probability of default: what is the influence of the current credit crisis on model validation?

Marco J. van der Burgt

ABSTRACT

According to Basel II, the probability of default (PD) should be a longterm average of one-year default rates. In this paper, long term is interpreted as one business cycle. When the PD is compared with the actual observed default rates in the PD rating validation process, two questions are relevant: how long is a business cycle and where are we in the business cycle? We present two techniques in order to address these questions: Fourier analysis and wavelet analysis. The analysis of default rates in the period 1981-2007 from Standard & Poor's reveals two business cycles of 10.67 years.

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

If you already have an account, please sign in here.

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: