Kamakura upgrades credit default prediction software

The company said version 3.0 of its Jarrow-Chava default probability KDP-jc is an improvement on previous models that tended to overestimate the number of defaults.

The software uses ‘hazard rate’ modelling to predict the number of public company defaults, combining macro-economic factors, financial ratios and stock price and index information.

Leonard Matz, managing director of marketing at Kamakura, said the model, completed this month, would be automatically available to clients with older versions. He declined to specify names, but said there were “about a dozen” customers. Matz also declined to comment on cost.

Donald van Deventer, chief executive of Kamakura, called the model “a significant step forward” in addressing the problems of previous models that had “an excess of false predictions of default, a modest degree of accuracy and a surprisingly low correlation between the actual and expected number of defaults". Van Deventer added that the model had been tested for three dimensions of risk: ordinal ranking of companies by riskiness, consistency between actual and predicted defaults, and minimisation of false positives. In all tests the new version has outperformed older models, said Kamakura.

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