Journal of Risk Model Validation

On the mathematical modeling of point-in-time and through-the-cycle probability of default estimation/ validation

Xin Zhang and Tony Tung

  • First formal mathematical model for PIT and TTC PD.
  • Correct variance evaluation for PD estimation/validation.
  • Discussion over IFRS9 PD possibly based on rank statistics.
  • Critiques on Moody’s TTC EDF and potential alternative solutions.

Since Basel II, the second of the Basel Accords, was first published in June 2004, banks around the world have been engaged in a continuous effort to develop methodologies to estimate the key parameters: probability of default (PD), loss given default (LGD) and exposure at default (EAD). In this paper, we focus on PD estimation and validation.  We provide the mathematical modeling for both point-in-time (PIT) and through-the-cycle (TTC) PD estimation, and discuss their relationship and application in our banking system.

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