TITLE:
Extending Multi-Period Pluto and Tasche PD Calibration Model Using Mode LRDF Approach
AUTHORS:
Denis Surzhko
KEYWORDS:
Credit Risk, Low Default Portfolio, PD Calibration
JOURNAL NAME:
Journal of Mathematical Finance,
Vol.4 No.4,
August
28,
2014
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.