Journal of Applied Finance & Banking

Multi-period PD Calibration Framework for LDP Portfolios

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  • Abstract

    The intention of this paper is to propose PD calibration framework for low default portfolios (LDP) that allows producing smooth non-zero PD estimates for any given time horizon within the length of economic cycle. The approach produces PDs that are consistent with two main anchors PIT and TTC PD estimates and are subject to smooth, monotonic transition between those two anchors. In practise, proposed framework could be applied to risk-based pricing of LDP portfolio deals. Moreover, according to the author opinion, the approach is generally compliant with the new IFRS 9 requirements regarding PD term-structure calibration for provisioning.