9

The argument about Basel is an adjunct to the central bank argument. There, a relatively price-insenstive CB either distorts credit by buying it directly (ECB, Fed wrt Agencies). Or distorts it indirectly by distorting the govvie market, pushing hitherto govvie holders into credit markets at a different price to what everyone would see without this effect. ...


4

Assume, for a moment, that all of the math behind modern portfolio theory is incorrect. See, for example, this video on deriving the distribution of returns. Without the normality assumption, indexing and methodologies like the Basel accords are not neutral. The Gaussian distribution is the result of a convergent process over time. The system has to have ...


2

Assume your outcome/dependant variable is the rating agencies rating category, say 10 to 20 rating categories, you can use ordinal logistic regression which is more natural for this kinda problem. So the model will predict the rating category. If your dependant variable is the internal default flag then you can have your model predict the default rate and ...


2

Yes, you can. Also, do not use Altman's Z. The extreme scores are predictive, but a load of empirical research shows the intermediate values are not predictive. The best solution is a Bayesian solution because you are gambling money. Bayesian methods are coherent. Coherence is the statistical property by which fair gambles can be placed. Frequentist ...


1

Note that Altman Z-Scoring model is calibrated on a sample many years ago. Therefore, a discrimination with these specific values for the coefficients is quite arbitrary. In that situation I think there are 2 options Option 1: Use the Altman's calibrated Z-Score as an indicator Suppose that you have a sample of $N$ private companies, where $D$ of them have ...


1

If you have access to the payment history then would not it be better to estimate the loss rate using historical payment data? The thing with the interest rate is it will include compensation for a lot of other factors as well, such as funding cost, capital charge, servicing cost etc. And some of these would vary by vintage, for example the funding cost ...


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