a pratical approach to validate a pd model

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1、APracticalApproachtoValidatingaPDModelAbstractThecapitaladequacyframeworkBaselIIaimstopromotetheadop-tionofstrongerriskmanagementpracticesbythebankingindustry.Theimplementationmakesvalidationofcreditriskmodelsmoreim-portant.Lendersthereforeneedavalidationmethodologytoc

2、onvincetheirsupervisorsthattheircreditscoringmodelsareperformingwell.Inthispaperwetakeupthechallengetoproposeandimplementasimplevalidationmethodologythatcanbeusedbybankstovalidatetheircreditriskmodellingexercise.Wewillcontextualisetheproposedmethodologybyapplyingittoad

3、efaultmodelofmortgageloansofacommercialbankintheNetherlands.JELclassification:E42;E58;G21Keywords:CreditRisk;Probabilityofdefault;BaselII;StatisticalValidation;LogitModel1IntroductionSinceJune1999theBaselCommitteeonBankingSupervisionhaspub-lishedseveralproposalsforrevis

4、ingtheexistingBaselIcapitaladequacyframework.Therevisedframework,knownasBaselII(BaselCommitteeonBankingSupervision(2006)),isbasedonthreepillars:minimumcapitalrequirements,supervisoryreview,andmarketdiscipline.Itaimstopromotetheadoptionofstrongerriskmanagementpracticesb

5、ythebankingindustry.OneofthemaindifferencesbetweentheBaselIandBaselIIframeworksisthatbanks’possibilitiestouseinternalriskassessmentsasinputstocapitalrequirementsareconsiderablyenlarged.DuffieandSingleton(2003)cate-gorizetheriskfacedbybanksinto:marketrisk,creditrisk,liquid

6、ityrisk,operationalriskandsystemicrisk.Inthispaperwefocusoncreditrisk.WithintheframeworkofBaselII,bankscanoptfordifferentapproachestoassesstheircreditrisk.Morespecifically,banksmaychoosebetweenastan-dardizedapproachwherefixedriskweightsareusedandnodifferentiationismadeonth

7、ebasisofactualrisk,andtheinternalratingsbasedapproach(IRB),forwhichriskweightsarebasedontheactualriskoftransactionsandbankscanuseownestimatesoftheprobabilityofdefault(PD).TheimplementationofBaselIIraisesmanytechnicalquestionsregard-ingthedevelopmentandcalibrationofcred

8、itriskmodels.Italsomakesthevalidationofcreditriskmodelsmuchmoreimportant,e.g.sincetheframe-workrequiresstrongeffortsby