HONOLULU, October 14, 2003: Kamakura Corporation announced today that it is releasing new research on the predictive capability of major credit models and their performance through the credit cycle from 1990 to 2002. Kamakura's results are included in the article "Advanced Credit Model Performance Testing to Meet Basel Requirements" and is forthcoming as a chapter in The Basel Handbook -- A Guide for Financial Practitioners, slated for publication this fall from RISK Publications with Michael Ong as editor. A draft version of the paper by Donald R. van Deventer and Xiaoming Wang is available for download from the research section of Kamakura's web site (listing # 106). The paper compares the three major classes of credit models in two dimensions: forecasting capability and calibration to actual defaults over the credit cycle from 1990 to 2002. Complete test results are being released to interested financial institutions regulators world-wide.
"Both lenders and financial regulators need accurate information on credit model forecasting capability and their consistency with actual defaults over the full credit cycle," said Donald R. van Deventer, Kamakura Chairman and Chief Executive Officer. "Reduced form credit models, the Merton structural credit model, and a hybrid model have rarely been tested on a common default data base. This study outlines a Basel II-compliant methodology for measuring forecasting accuracy called the predictive ROC accuracy ratio. It also outlines a quantitative measure for calibrating the consistency between actual and expected defaults from each model."
The paper also outlines a number of common pitfalls in assessing credit model performance. The research was completed on a data base of 1.3 million monthly observations and more than 1,250 defaults. An update of the study is completed every six months for Kamakura default probability clients and bank regulators. The next update includes a comparison based on more than 1,600 defaults.
The paper extends the credit model testing procedures outlined in Credit Risk Models and the Basel Accords (John Wiley & Sons, 2003) by Kamakura's van Deventer and Kenji Imai.