This paper proposes two methodologies that are designed to test whether observed default rates are in line with default probabilities applied within the Basel framework. This is done by integrating the one-factor model of the Basel framework into the score and the order test statistic. The first...

The dependency of the individual default behavior of a firm on the state of the credit cycle is widely implemented in credit portfolio models and ultimately reflected in the Basel II one-factor model determining capital requirements. Despite this, macroeconomic variables able to represent this...

The aim of validating default probabilities is to analyze whether these are not too low. For small sample sizes, however, there are not enough observations available to detect excessively low default probabilities.We therefore propose a modification of default probability validation which...

This article proposes a sequential Bayesian updating approach to estimate default probabilities on rating grade level for no- and low-default portfolios. Bayesian sequential updating allows to obtain default probabilities also for those rating grades for which no defaults have been observed. The...