Low-default portfolios without simulation

Low-default portfolios are a key Basel II implementation challenge, and various statistical techniques have been proposed for use in PD estimation for such portfolios. To produce estimates using these techniques, typically Monte Carlo simulation is required. Tom Wilde and Lee Jackson show how these PD estimates may be calculated analytically by calibrating CreditRisk+ to a Merton model of default behaviour, resulting in quick and accurate PD estimates without the need for simulation

Low-default portfolios (LDPs) are portfolios with limited default experience from which to obtain robust default probabilities (PDs) for Basel II or internal risk management purposes. A portfolio might be an LDP because there are few obligors of that type or quality in existence today, or because relevant obligors have not existed for long, or because obligors have high credit quality. PD estimates for LDPs may have large estimation errors, and LDPs are held by some commentators to require