The aim of validating default probabilities is to analyze whether these are not too low. For small sample sizes, however, there are not enough observations available to detect excessively low default probabilities.We therefore propose a modification of default probability validation which...

The Basel Accord assumes an inverse relationship between the probability of default and the asset correlation parameter, with the latter being responsible for modeling the degree of cyclicality of default rates. Previous empirical studies that embedded the formula of the Basel Accord into a...

Accounting standards require that financial institutions must measure default risk with respect to the full maturity of a financial instrument. This requires forecasting of future default probabilities. The forecast of future default probabilities concerns two aspects: forecasting macroeconomic...

Accounting standards require that financial institutions must measure default risk with respect to the full maturity of a financial instrument. This requires forecasting of future default probabilities. The forecast of future default probabilities concerns two aspects: forecasting macroeconomic...

Accounting standards require from financial institutions to consider and forecast multiple macroe- conomic scenarios when calculating loan loss provisions. Loan loss provisions protect a financial institutions against losses. But how to determine objectively the number of scenarios and to...

Credit ratings are expert systems which assess the likelihood of a borrower to default. The Basel Accord allows banks to base regulatory capital requirements on the default probability of a rating. Banks must prove that the employed default probabilities are valid estimates. Since in credit risk...