ESTIMATION OF DEFAULT PROBABILITY FOR LOW DEFAULT PORTFOLIOS

• Main Author: Laima Dzidzevičiūtė
• Format: Article
• Language: English
• Published: Vilnius University Press 2012-01-01
• Series: Ekonomika
• Online Access: https://www.journals.vu.lt/ekonomika/article/view/902

This article presents several approaches to estimating the probabilities of default for low default portfolios, their advantages and disadvantages, and provides exemplary calculations using data of one external credit register of Lithuania. The results show that three approaches seem to be most appropriate: those of K. Pluto and D. Tasche (2005) without correlation, and those of N. M. Kiefer (2006) and A. Forrest (2005) without correlation. The first one could be easily implemented by banks; however, if the ordinal ranking of obligors is incorrect, then the monotony of probabilities of default is not ensured. The same problem exists with the second approach. The A. Forrest (2005) approach without correlation ensures the monotony of default probabilities and allows estimating conservative PDs; however, it requires programming skills, otherwise iterative recalculation will be very time-consuming.