Extending Multi-Period Pluto and Tasche PD Calibration Model Using Mode LRDF Approach

Denis Surzhko

Credit Risk Modeling Unit, OJSC VTB Bank, Moscow, Russia.

DOI: 10.4236/jmf.2014.44026                

Abstract

The intention of this paper is to propose extension to the Pluto and Tasche PD calibration model for low default portfolios that could produce more stable LRDF estimates and eliminate the necessity of quartile choice, while preserving adequate level of conservatism. Multi-period Pluto and Tasche model allows us to fulfill Basel committee requirements regarding long-term LRDF calibration even for portfolios with no observable defaults. The main drawback of that approach is a very strict requirement for the sample: only borrowers that are observable to the bank within each point on long-term horizon could be used as observations. Information regarding rating migrations, borrowers that arrived in the portfolio after sample cutoff date and borrowers that left the portfolio before the end of long-term calibration horizon should be excluded from the sample. Proposed Mode approach pairs Pluto and Tasche model with mode LRDF estimator (proposed by Canadian OSFI), as the results, it eliminates drawbacks of the original Pluto and Tasche model.

Keywords

Credit Risk, Low Default Portfolio, PD Calibration

Conflicts of Interest

The authors declare no conflicts of interest.

References

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