The Analytics of Risk Model Validation

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Of the credibility of mapping and benchmarking credit risk estimates for internal rating systems

Vichett Oung^** The author is economist at Banque de France, Paris, FranceThe views expressed here are his own and do not necessarily represent the views of the Banque de France.

Abstract

This chapter examines the application of the credibility theory, originally developed in the field of risk theory and insurance mathematics, to benchmarking of credit ratings from heterogenous and different credit portfolios. This approach offers an interesting theoretical framework in which robust ratings comparability is enabled by explicitly correcting risk bucket estimates for the portfolio’s structure effects that are deemed significant. Moreover, statistical tests ...