Corporate Credit Risk Modeling: Quantitative Rating System and Probability of Default Estimation

70 Pages Posted: 17 May 2005

Date Written: April 2005

Abstract

The literature on corporate credit risk modeling for privately-held firms is scarce. Although firms with unlisted equity or debt represent a significant fraction of the corporate sector worldwide, research in this area has been hampered by the unavailability of public data. This study is an empirical application of credit scoring and rating techniques applied to the corporate historical database of one of the major Portuguese banks. Several alternative scoring methodologies are presented, thoroughly validated and statistically compared. In addition, two distinct strategies for grouping the individual scores into rating classes are developed. Finally, the regulatory capital requirements under the New Basel Capital Accord are calculated for a simulated portfolio, and compared to the capital requirements under the current capital accord.

Keywords: Credit scoring, credit rating, private firms, discriminatory power, Basel capital accord, capital requirements

JEL Classification: C13, C14, G21, G28

Suggested Citation

Fernandes, João, Corporate Credit Risk Modeling: Quantitative Rating System and Probability of Default Estimation (April 2005). Available at SSRN: https://ssrn.com/abstract=722941 or http://dx.doi.org/10.2139/ssrn.722941

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