Validation techniques and performance metrics for loss given default models

David Li, Ruchi Bhariok, Sean Keenan, Stefano Santilli

Abstract

ABSTRACT

This paper presents a practical framework for empirically evaluating the performance of loss given default models as part of a greater credit risk management infrastructure. It discusses the use of quantitative metrics such as the confusion matrix, the expected loss shortfall, and the loss capture ratio as part of a periodic validation/approval process.