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| Autores principales: | , |
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| Formato: | Preprint |
| Publicado: |
2025
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| Materias: | |
| Acceso en línea: | https://arxiv.org/abs/2508.15651 |
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| _version_ | 1866912547431514112 |
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| author | Dömötör, Barbara Illés, Ferenc |
| author_facet | Dömötör, Barbara Illés, Ferenc |
| contents | Banks are required to use long-term default probabilities (PDs) of their portfolios when calculating credit risk capital under internal ratings-based (IRB) models. However, the calibration models and historical data typically reflect prevailing market conditions. According to Basel recommendations, averaging annual PDs over a full economic cycle should yield the long-term PD. In practice, the available data are often temporally incomplete - even for high-risk portfolios. In this paper, we present a method for the simultaneous calibration of long-term PDs across all sub-portfolios, based on the single risk factor model embedded in the Basel framework. The method is suitable even for smaller, budget-constrained institutions, as it relies exclusively on the bank's own default data. A complete dataset is not required - not even for any individual sub-portfolio - as the only prerequisite is the presence of overlapping data before and after the missing values, a mild condition that is typically met in practical situations. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2508_15651 |
| institution | arXiv |
| publishDate | 2025 |
| record_format | arxiv |
| spellingShingle | Through-the-Cycle PD Estimation Under Incomplete Data -- A Single Risk Factor Approach Dömötör, Barbara Illés, Ferenc Risk Management Banks are required to use long-term default probabilities (PDs) of their portfolios when calculating credit risk capital under internal ratings-based (IRB) models. However, the calibration models and historical data typically reflect prevailing market conditions. According to Basel recommendations, averaging annual PDs over a full economic cycle should yield the long-term PD. In practice, the available data are often temporally incomplete - even for high-risk portfolios. In this paper, we present a method for the simultaneous calibration of long-term PDs across all sub-portfolios, based on the single risk factor model embedded in the Basel framework. The method is suitable even for smaller, budget-constrained institutions, as it relies exclusively on the bank's own default data. A complete dataset is not required - not even for any individual sub-portfolio - as the only prerequisite is the presence of overlapping data before and after the missing values, a mild condition that is typically met in practical situations. |
| title | Through-the-Cycle PD Estimation Under Incomplete Data -- A Single Risk Factor Approach |
| topic | Risk Management |
| url | https://arxiv.org/abs/2508.15651 |