Validating the discriminatory power of a rating system is not trivial: the underlying default probabilities that determine the discriminatory power change over time due to changes in the macroeconomic environment and the credit portfolio. This paper presents a methodology using Basel II's...

This paper proposes two methodologies that are designed to test whether observed default rates are in line with default probabilities applied within the Basel framework. This is done by integrating the one-factor model of the Basel framework into the score and the order test statistic. The first...