Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/70471
Authors: 
Kiefer, Nicholas M.
Year of Publication: 
2008
Series/Report no.: 
CAE Working Paper 08-02
Abstract: 
Capital allocation decisions are made on the basis of an assessment of creditworthiness. Default is a rare event for most segments of a bank's portfolio and data information can be minimal. Inference about default rates is essential for efficient capital allocation, for risk management and for compliance with the requirements of the Basel II rules on capital standards for banks. Expert information is crucial in inference about defaults. A Bayesian approach is proposed and illustrated using prior distributions assessed from industry experts. A maximum entropy approach is used to represent expert information. The binomial model, most common in applications, is extended to allow correlated defaults yet remain consistent with Basel II. The application shows that probabilistic information can be elicited from experts and econometric methods can be useful even when data information is sparse.
Subjects: 
Bayesian inference
Basel II
risk management
prior elicitation
small probability estimation
Document Type: 
Working Paper

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