Journal of Risk Model Validation
ISSN:
1753-9579 (print)
1753-9587 (online)
Editor-in-chief: Steve Satchell
On the mathematical modeling of point-in-time and through-the-cycle probability of default estimation/ validation
Xin Zhang and Tony Tung
Need to know
- 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.
Abstract
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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