Work

A Hypothesis Test for the Long-Term Calibration in Rating Systems with Overlapping Time Windows

Year: 2024

Type: article

Abstract: We present a statistical test for the long-term calibration in rating systems that can deal with overlapping time windows as required by the guidelines of the European Banking Authority (EBA), which apply to major financial institutions in the European System. In accordance with regulation, rating systems are to be calibrated and validated with respect to the long-run default rate. The consideration of one-year default rates on a quarterly basis leads to correlation effects which drastically influence the variance of the long-run default rate. In a first step, we show that the long-run default rate is approximately normally distributed. We then perform a detailed analysis of the correlation effects caused by the overlapping time windows and solve the problem of an unknown distribution of default probabilities.

Source: Risks

DOI: 10.3390/risks12080131

Authors: Patrick Kurth, Max Nendel, Jan Streicher

Institutions: Landesbank Baden-Württemberg, Bielefeld University

Language: English

Topic: Credit Risk and Financial Regulations

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: gold

Estimated APC paid: $2,065

Funder: Deutsche Forschungsgemeinschaft