RT Journal Article
SR Electronic
T1 Benchmarking Model of Default Probabilities of Listed Companies
JF The Journal of Fixed Income
FD Institutional Investor Journals
SP 76
OP 86
DO 10.3905/jfi.2005.591611
VO 15
IS 2
A1 Cho Hoi Hui
A1 Tak-Chuen Wong
A1 Chi-Fai Lo
A1 Ming-Xi Huang
YR 2005
UL https://pm-research.com/content/15/2/76.abstract
AB This article presents a benchmarking model for validation of default probabilities of listed companies for Basel II purposes. The model is based on the recent studies on the predictive capability of structural credit risk models. Benchmark ratings and one-year default probabilities are assigned to companies by mapping the term structures of default probabilities of the companies generated by a structural model based on stochastic leverage ratios to the term structures of default rates reported by rating agencies. The empirical results show that the benchmarking model has adequate discriminatory power of ranking credit risk. The association between the benchmark ratings and external credit ratings is statistically significant. Benchmark default probabilities obtained from the model could thus be used as alternative external and independent estimates for comparisons with bank’s internal default probability estimates. Significant deviations from this benchmark provide a reason to review the internal estimates.