The Probability Approach to Default Probabilities

by Nicholas M. Kiefer

Abstract

The probability approach to uncertainty and modeling is applied to default probability estimation. Default estimation for low-default portfolios has attracted attention as banks contemplate the requirements of Basel II's IRB rules. Nicholas M. Kiefer proposes the formal introduction of expert information into quantitative analysis. An application treating the incorporation of expert information on the default probability is considered in detail.

Disclaimer

Any whole or partial reproduction of material in this paper should include the following citation: Nicholas M. Kiefer, " The Probability Approach to Default Probabilities," Department of Economics and Statistical Science, Cornell University; and the Office of the Comptroller of the Currency, Working Paper 2007-1, March 15, 2007

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