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October 2018

Identify the risks in your private firm portfolio using Moody’s Analytics RiskCalc™ Early Warning Toolkit methodology.

This highly-informative webinar provides a practical approach for effectively monitoring your organization’s large portfolios and reducing your risk exposure.

Private firm Expected Default Frequency (EDF™) metrics are forward-looking probability of default measures that combine financial statement and equity market information into a highly-predictive measurement of standalone credit risk. The RiskCalc Early Warning Toolkit recommends tracking five EDF-related metrics associated with elevated future default risk. Learn which metrics you should be identifying and tracking to reduce your portfolio risk exposure.

Our subject matter experts discuss:

  • High-level best practices and the practical application of the Early Warning Toolkit for private firms.
  • Recent Early Warning Toolkit research enhancements including optimized EDF trigger levels, and a Deterioration Propensity Index.
  • Tools available via Moody's Analytics Excel Add-in, including customized templates and dashboards.
Related Insights

Moody's Analytics Webinar: Identifying At-Risk Firms in Your Private Firm Portfolio

Learn how to identity the risks in your private firm portfolio using Moody’s Analytics RiskCalc™ Early Warning Toolkit methodology.

October 04, 2018 WebPage Dr. Douglas Dwyer
Webinar-on-Demand

Identifying At-Risk Firms in Your Private Firm Portfolio

Identifying At-Risk Firms in Your Private Firm Portfolio

October 2018 Pdf Dr. Douglas Dwyer, Gustavo Jimenez, Ziyi Sun
Whitepaper

Features of a Lifetime PD Model: Evidence from Public, Private, and Rated Firms

With the new CECL and IFRS 9 requirements, we see an increased need for lifetime probability of default models. In this document, we formally investigate and summarize the term structure properties consistently seen across public, private, and rated firms. We observe that the default rate for “good” firms tends to increase over time, while the default rate for “bad” firms decreases over time, an indication of the mean-reversion effect seen with firms' default risk.

May 2018 Pdf Sajjad Beygiharchegani, Uliana Makarov, Dr. Janet ZhaoDr. Douglas Dwyer
Whitepaper

Combining Financial and Behavioral Information to Predict Defaults for Small and Medium-Sized Enterprises – A Dynamic Weighting Approach

One large challenge lenders currently face is how to combine different types of information into metrics that can support good business decisions. Currently, the banking industry uses two primary types of information — financial information and behavioral information — independently, to assess risk. Financial information includes Income Statement, Balance Sheet, Cash Flow, and Financial Ratios. Behavioral information includes spending and payment patterns, among others. Both types of information provide unique insights, but, to date, they have not been combined to generate one comprehensive risk metric for commercial use.

September 2017 Pdf Alessio Balduini, Dr. Douglas DwyerDr. Janet Zhao, Sara Gianfreda, Reeta Hemminki, Lucia Yang
Article

Combining Information to Better Assess the Credit Risk of Small Firms and Medium-Sized Enterprises

In this article, we discuss the issues associated with acquiring behavioral and financial data and transforming it into a business decision. We also present a unified modeling approach for combining the information into a credit risk assessment for both small firms and medium-sized enterprises.

July 2017 Pdf Dr. Douglas Dwyer
Article

Combining Information to Better Assess the Credit Risk of Small Firms and Medium-Sized Enterprises

In this article, we combine financial information with behavioral factors to more accurately assess credit risk for small firms and medium-sized enterprises.

July 2017 WebPage Dr. Douglas Dwyer
Article

Weekly Market Outlook: Broad Measures of Sales and Profits Are Mediocre

First-quarter 2017 revealed solid operating results for the S&P 500. Nevertheless, other broad measures of business-sector operations have been flat to lower.

June 2017 Pdf Franklin Kim, Njundu Sanneh, Yukyung Choi, Irina Baron, John Lonski, David Munves, Tomas Holinka, Katrina Ell, Xian Li, Alaistair Chan
Article

Weekly Market Outlook: Capital Allocation and Low Bond Yields Reflect Aging Upturn

Not too long ago the value of mergers and acquisitions involving US businesses moving 12-month sum sank by -19% from February 2016's record high of $3.485 trillion to November 2016's most recent low of $2.811 trillion. This measure of M&A has since recovered to the $3.47 trillion of the 12-months-ended April 2017 and seems destined to soon establish a new zenith.

May 2017 Pdf Franklin Kim, Njundu Sanneh, Yukyung Choi, Irina Baron, John Lonski, David Munves, Tomas Holinka, Katrina Ell, Xian Li, Emily Dabbs
Article

Weekly Market Outlook: Lower Bond Yields Ward Off Wider Spreads

Elevated political risk has slashed the likelihood of either tax reform or increased infrastructure spending taking effect in 2017. The much reduced probability of a stimulatory fiscal impulse implies interest rates will be significantly lower than otherwise.

May 2017 Pdf Franklin Kim, Njundu Sanneh, Yukyung Choi, Irina Baron, John Lonski, David Munves, Tomas Holinka, Katrina Ell, Xian Li, Emily Dabbs
Article

Weekly Market Outlook: Much Doubt Surrounds VIX Index's Optimism

Financial markets were recently visited by a rarity. During the past week, the VIX index closed under 10 points on May 8 and 9. Since its start in 1990, the VIX index has closed under 10 points on only 11, or 0.1%, of the span's nearly 7,000 trading days.

May 2017 Pdf Franklin Kim, Njundu Sanneh, Yukyung Choi, Irina Baron, John Lonski, David Munves, Tomas Holinka, Katrina Ell, Xian Li, Emily Dabbs
Article

Weekly Market Outlook: Inflation's Bad Breadth May Help Contain Interest Rates

Not too long ago, the high-yield bond spread swelled and the projected default rate soared. However, that intensification of credit stress would be quickly reversed mostly because debt repayment problems were largely confined to the oil and gas industry. In other words, the late 2015 and early 2016 worsening of corporate credit conditions lacked enough breadth to endanger both financial stability and the business cycle upturn.

May 2017 Pdf David Munves, John Lonski, Ben Garber, Yukyung Choi, Irina Baron, Xian Li, Franklin Kim, Njundu Sanneh
Article

Weekly Market Outlook: Treasury Yields May Fall Short of Consensus Views

Once again, the 10-year Treasury yield confounds the consensus. As of early April, the consensus had predicted that the benchmark 10-year Treasury would average 2.6% during 2017's second quarter. To the contrary, the 10-year Treasury yield has averaged a much lower 2.29% thus far in the second quarter, including a recent 2.30%. Moreover, the 10-year Treasury yield has moved in a direction opposite to what otherwise might be inferred from March 14's hiking of fed funds' midpoint from 0.625% to 0.875%. For example, April 27's 10-year Treasury of 2.30% was less than its 2.62% close of March 13, just prior to the latest Fed rate hike.

April 2017 Pdf Franklin Kim, Njundu Sanneh, Yukyung Choi, Irina Baron, John Lonski, David Munves, Tomas Holinka, Katrina Ell, Xian Li, Emily Dabbs
Article

Weekly Market Outlook: Credit Improves as Debt Growth Slows and Equities Rally

The worrisome overvaluation of US equities has benefits for credit. It firmed US corporate credit quality via an increase in the number of rating upgrades ascribed to mergers, acquisitions, divestitures, and infusions of common equity capital. And at the same time it reduced the frequency of downgrades stemming from highly leveraged takeovers, stock buybacks, and special dividends. As shown by Q4-2016's smallest amount of nonfinancial-corporate net borrowing since Q4-2010 and the lowest reading on net stock buybacks since Q2-2014, 2016's equity rally has effectively increased reliance on common equity capital, while dulling the incentive for companies to buy back their often richly priced equity shares.

April 2017 Pdf David Munves, John Lonski, Ben Garber, Yukyung Choi, Irina Baron, Xian Li, Franklin Kim, Njundu Sanneh
Article

Weekly Market Outlook: Credit Cycle Enjoys a Respite

For the first time since 1987-1988, the US credit cycle has stabilized following a surge by credit rating downgrades relative to upgrades, a jump by the high-yield default rate, and a pronounced widening by corporate bond yield spreads. After six years at 49% of US high-yield credit rating revisions from July 2009 through June 2015, downgrades soared to 71% in the year-ended June 2016. Then downgrades eased to 58% for the year-ended March 2017 and sank to 48% during Q1-2017.

April 2017 Pdf David Munves, John Lonski, Ben Garber, Yukyung Choi, Irina Baron, Xian Li, Franklin Kim, Njundu Sanneh
Article

Weekly Market Outlook: Bond Yields Will Fall When the Equity Bubble Bursts

Stocks are not cheap. Thus, equities are vulnerable to a deep slide in the event profits contract or interest rates undergo a disruptive climb. The latter would probably include an increase by the 10-year Treasury yield to at least 2.75%.

April 2017 Pdf David Munves, John Lonski, Ben Garber, Yukyung Choi, Irina Baron, Xian Li, Franklin Kim, Njundu Sanneh
Article

Weekly Market Outlook: Near Perfect Equity Market Firms Credit

High-yield bonds endured a wild ride in March. A composite speculative-grade bond yield started the month at 5.65% for its lowest reading since September 2014. However, by March 14 this had swiftly climbed to 6.34%, which was the highest since December 16, 2016, only to suddenly drop to 6.04% as of March 29.

March 2017 Pdf David Munves, John Lonski, Ben Garber, Yukyung Choi, Irina Baron, Xian Li, Franklin Kim, Njundu Sanneh
Article

Weekly Market Outlook: Rate Hike Won't Hurt Bonds Amid Low Inflation

Corporate bond yield spreads often are well behaved during the early installments of a series of Fed rate hikes. Because rate hikes ordinarily occur amid above-average business activity and profits growth, the high-yield bond spread shows a decidedly below-trend median of 387 bp for those spans of the last 30 years that start with a rate hike and end with the final month prior to a rate cut.

March 2017 Pdf David Munves, John Lonski, Ben Garber, Yukyung Choi, Irina Baron, Xian Li, Franklin Kim, Njundu Sanneh
Article

Weekly Market Outlook: Less Borrowing Amid Faster Profits Trims Risk

In 2016's final quarter, US nonfinancial companies markedly reduced net borrowing. In turn, for the first time in more than two years, corporate debt grew more slowly than both internal funds and pretax profits. Election-related uncertainties and an overvalued equity market helped to explain the slowdown in borrowing, while a firming of industrial commodity prices supplied lift to corporate earnings. Going forward, leveraging may continue to fade until the next erosion of profitability triggers an increase in debt-funded equity buybacks that intend to buttress earnings per share.

March 2017 Pdf David Munves, John Lonski, Ben Garber, Yukyung Choi, Irina Baron, Xian Li, Franklin Kim, Njundu Sanneh
Article

Weekly Market Outlook: Skinny Caa Spread Defies Default Outlook

An exceptionally thin median spread for default-prone Caa-rated bonds reflects an unsustainably high tolerance of credit risk. Often, an ultra-thin spread for Caa-grade bonds is followed by wider yield spreads for both the Caa category and the entire high-yield market.

March 2017 Pdf David Munves, John Lonski, Ben Garber, Yukyung Choi, Irina Baron, Xian Li, Franklin Kim, Njundu Sanneh
Article

Weekly Market Outlook: Credit and Equities Say Yes to a Rate Hike

When the doves turn hawkish, a Fed rate hike is practically assured. In response to a spate of warnings from high-ranking Fed officials, the CME Group's FedWatch tool recently assigned an 80% probability to a 25 bp hiking of fed funds' midpoint to 0.875% at the FOMC's March 15 meeting. Current financial market conditions strongly support a ratcheting up of this critical benchmark interest rate.

March 2017 Pdf Franklin Kim, Njundu Sanneh, Yukyung Choi, Ben Garber, Irina Baron, John Lonski, David Munves, Tomas Holinka, Katrina Ell, Faraz Syed, Xian Li
Article

Weekly Market Outlook: Low VIX and Thin Spreads Could Be on Thin Ice

The February 1 FOMC meeting minutes noted two interrelated developments. First, the narrowing by “corporate bond spreads for both investment- and speculative-grade firms” to widths that “were near the bottom of their ranges of the past several years.” Secondly, some FOMC members were struck by how “the low level of implied volatility in equity markets appeared inconsistent with the considerable uncertainty attending the outlook for such policy initiatives.”

February 2017 Pdf David Munves, John Lonski, Ben Garber, Njundu Sanneh, Yukyung Choi, Irina Baron, Franklin Kim, Xian Li
Article

Weekly Market Outlook: Market Data Highlights

The latest market data from Weekly Market Outlook.

February 2017 Pdf Franklin Kim, Njundu Sanneh, Yukyung Choi, Ben Garber, Irina Baron
Article

Weekly Market Outlook: Demography Is Destiny for Debt

Demography exerts considerable influence over business activity and financial markets. Well into the future, the unprecedented aging of the US population and workforce weighs heavily against the Trump administration's goal of achieving 3% to 4% calendar-year growth for the US economy. Frankly, it is beyond the scope of policy to quickly make America young again.

February 2017 Pdf David Munves, John Lonski, Ben Garber, Njundu Sanneh, Yukyung Choi, Irina Baron, Franklin Kim, Xian Li
Article

Sovereign Risk Report: Likely Fed Rate Hike and Oil Prices Grab Market Attention

Global financial markets are focused on signs that the US Federal Reserve will lift its policy rate at its December 13-14 meeting. Oil prices also preoccupied investors, as crude oil prices continued to recover this past week.

November 2016 Pdf Irina Baron, Xian Li
Article

US Political Shock Jolts Global Credit Risk Measures | Moody's Analytics

Donald Trump's stunning win over his Democratic Party opponent, Hillary Clinton, was the dominant factor driving global market-based measures of credit risk since the election.

November 2016 Pdf Irina Baron, Xian Li
Brochure

CDS-Implied EDF™ Measures and Fair Value CDS Spreads – At a Glance

CDS-Implied EDF (CDS-I-EDF) measures are physical default probabilities derived from credit default swap (CDS) spreads. For entities with both publicly traded equity and liquid CDS transactions, CDS-I-EDF measures provide an alternative assessment of default risk that can be directly compared with default probabilities (PDs) calculated by the Public Firm EDF model. For entities without publicly traded equity, CDS-I-EDF measures expand the default probability coverage of CreditEdge, Moody's Analytics suite of industry-leading credit metrics that incorporate signals from equity and credit markets.

November 2016 Pdf Irina Baron
Article

Deutsche Bank's Adversity Lifts its Probability of Default

Germany's biggest bank, Deutsche Bank AG, faced intense scrutiny from investors in recent months. The company's EDF™ (Expected Default Frequency) has shown signs of deterioration as the company's financial risk has been elevated, as measured by its market leverage.

October 2016 Pdf Irina Baron
Webinar-on-Demand

Preparing for Defaults in China's Corporate Credit Market

In this webinar Moody’s Analytics discuss the Marco-economic and credit market conditions likely to affect the future risk of default for Chinese companies; way to measure and manage the default risk of Chinese firms, and strategies for early detection of default risk.

August 2016 WebPage David HamiltonGlenn Levine, Irina Baron
Whitepaper

RiskCalc Banks v4.0 Model

There has been a significant increase in the demand for quantitative tools that assess the default risk of banks across different geographies. Pooling data from more than 90 countries, we see commonalities in linking default risk to a specific set of financial ratios. This finding suggests that a prescribed set of financial ratios, properly transformed, works well in estimating banks' default risk in a robust fashion. With this insight, we constructed the RiskCalc™ Banks v4.0 Model, intended for assessing the probability of default (PD) for banks across different geographies and regulatory environments. The model provides a unified framework to assess bank risk across different countries and regions, as well as different economic cycles. The one-year model is based upon a set of well-defined and ready-to-calculate financial ratios that effectively measure bank profitability, leverage, liquidity, growth, and asset quality. The five-year model combines these ratios with a measure derived from an economic capital framework based upon portfolio theory. Specifically, this measure captures the unexpected loss of a bank's loan portfolio relative to its loss-absorbing capital. Validation results show that the model delivers strong and robust power in rank ordering high risk banks from low risk banks, and that the results are robust across geographies and bank sizes.

July 2016 Pdf Dr. Douglas DwyerDr. Janet Zhao, Yanruo Wang
Article

Angang Steel's Credit Risk Rises As Local Rating Agencies Remain Sanguine | Moody's Analytics

Angang Steel is one of China's largest steel producers, but in recent times slower economic growth, coupled with elevated steel production, have put downward pressure on prices and revenues.

June 2016 Pdf Irina Baron, Glenn Levine

Do Banks Need Third-Party Models?

This article discusses the role of third-party data and analytics in the stress testing process. Beyond the simple argument that more eyes are better, we outline why some stress testing activities should definitely be conducted by third parties.

December 11, 2015 WebPage Dr. Douglas DwyerDr. Tony Hughes
Whitepaper

Credit Risk Modeling of Public Firms: EDF9

EDF9 — the 9th generation of the Moody's Analytics Public Firm EDFTM (Expected Default Frequency) model — expands the frontiers of structural credit risk modeling. EDF metrics are forward-looking probabilities of default, available on a daily basis for 35,000-plus corporate and financial firms. The updated EDF9 model incorporates insights attained by evaluating the behavior of the prior version, EDF8, over the course of the recent financial and sovereign debt crises.

June 2015 Pdf Dr. Douglas Dwyer, Pooya Nazeran
Whitepaper

May 2015 U.S. Middle Market Risk Report

This semiannual report examines credit risk in the otherwise opaque U.S. private firm credit market. We report trends in 4 different areas of risk measurement.

May 2015 Pdf Stephanie Yu, Brian Waldman, Irina Korablev, Stafford Perkins, Dr. Douglas Dwyer
Whitepaper

RiskCalc Plus Stress Testing Model (ratio-based approach)

In this paper, we detail a RiskCalc™ Stress Testing Model (ratio-based approach), based upon economic and accounting principles. Our simple, yet fundamental, model assumptions make the framework adaptable to many uses, including: loss forecasting, pro forma analysis, stress testing, as a challenger or benchmark model, and for customized scenario analysis.

July 2014 Pdf Dr. Douglas DwyerDr. Janet Zhao, Monalisa Sen
Whitepaper

RiskCalc Plus C&I Stress Testing PD & LGD Model (granular approach) Overview

To help our clients build benchmark commercial and industrial (C&I) loss models for the Federal Reserve's Comprehensive Capital Analysis and Review (“CCAR”)/DFAST exercises, we have developed an approach designed specifically to calculate provisions for losses of C&I portfolios. Our approach utilizes Moody's Analytics probability of default (PD), loss given default (LGD), and exposure at default (EAD) econometric models, which are intuitive, parsimonious, make economic sense, and have good statistical fit. We construct these models using our public EDF credit measures, RiskCalc™ private firm EDF credit measures, and Moody's Default & Recovery Database and Credit Research Database.

July 2014 Pdf Nan Chen, Jian Du, Heather Russell, Dr. Douglas DwyerDr. Jing Zhang, Zhong Zhuang
Whitepaper

Usage and Exposures at Default of Corporate Credit Lines: An Empirical Study

A major source of firm funding and liquidity, credit lines can pose significant credit risk to the underwriting banks. Using a unique dataset pooled from multiple U.S. financial institutions, we empirically study the credit line usage of middle market corporate borrowers. We examine to what extent borrowers draw down their credit lines and the characteristics of those firms with high usage. We study how line usage changes with banks' internal ratings, collateral, and commitment size and through various economic cycles. We find that defaulted borrowers draw down more of their lines than non-defaulted borrowers. They also increase their usage when approaching default. Risky borrowers tend to utilize a higher percentage of their credit lines as well.

Whitepaper

October 2013 U.S. Middle Market Risk Report

This semiannual report examines credit risk in the otherwise opaque U.S. private firm credit market. We report trends in four different areas of risk measurement: realized defaults, internal bank ratings, financial statement-based information, and model-based risk estimates. We derive the statistics in this report from Moody's Analytics CRD™ (Credit Research Database).

October 2013 Pdf Shivansh Gulwadi, Irina Korablev, Stafford Perkins, Dr. Douglas Dwyer
Presentation

Establishing Best Practices for Stress Testing your Private Company C&I Portfolios

Learn about stress testing best practices and our RiskCalc™ Plus United States Stress Testing Models. This webinar focuses on stress testing best practices for the private company C&I asset class.

July 2013 Pdf Dr. Douglas Dwyer, Mehna Raissi, Christian Henkel
Whitepaper

May 2013 U.S. Middle Market Risk Report

This semiannual report examines credit risk in the otherwise opaque US private firm credit market. We report trends in four different areas of risk measurement: realized defaults, internal bank ratings, financial statement-based information, and model-based risk estimates. We derive the statistics in this report from Moody's Analytics Credit Research Database® (CRD).

May 2013 Pdf Bryce Bewley, Irina Korablev, Stafford Perkins, Dr. Douglas Dwyer, Dhivya Madhavan
Whitepaper

October 2012 U.S. Middle Market Risk Report

This semiannual report examines credit risk in the otherwise opaque US private firm credit market. We report trends in four different types of risk measures: actual defaults, internal bank ratings, financial statement-based information, and model-based risk estimates. The statistics in this report are derived from Moody's Analytics Credit Research Database® (CRD).

October 2012 Pdf Bryce Bewley, Dhivya Madhavan, Irina Korablev, Stafford Perkins, Dr. Douglas Dwyer
Whitepaper

The Effect of Imperfect Data on Default Prediction Validation Tests

Analysts often find themselves working with less than perfect development and/or validation samples and data issues typically impact the interpretation of default prediction validation tests. Discriminatory power and calibration of default probabilities are two key aspects of validating default probability models. Both are susceptible to data issues. In this paper, we look at how data issues affect three important power tests: the Accuracy Ratio, the Kolmogorov-Smirnov test, and the Conditional Information Entropy Ratio, as well as how data issues affect the Hosmer-Lemeshow test, a default probability calibration test. We employ a simulation approach that allows us to assess the impact of data issues on model performance when the exact nature of the data issue is known.

August 2011 Pdf Heather Russell, Qing Kang Tang, Dr. Douglas Dwyer
Presentation

RiskCalc™: New Research and Model Validation Results

In this presentation we examine the strengths of a risk calculation model that assesses localized accounting practices of individual countries within the wider context of the credit cycle. The model takes account of liquidity, profitability, activity, leverage, growth variables and other integrated factors to deliver objective results. Here we put the spotlight on exactly what this model can do and how it works.

May 2011 Pdf Dr. Douglas Dwyer
Whitepaper

Combining Quantitative and Fundamental Approaches in a Rating Methodology

This methodology proposes a combined approach to credit valuation and provides the framework for it.

November 2010 Pdf Dr. Douglas Dwyer, Heather Russell
Whitepaper

CDS-implied EDF™ Credit Measures and Fair-Value Spreads

In this paper, we present a framework that links two commonly used risk metrics: default probabilities and credit spreads. This framework provides credit default swap-implied (CDS-implied) EDF™ (Expected Default Frequency) credit measures that can be compared directly with equity-based EDF credit measures.

March 2010 Pdf Dr. Douglas Dwyer, Zan Li, Shisheng Qu, Heather Russell, Dr. Jing Zhang
Whitepaper

Bank Failures Past and Present: Validating the RiskCalc V3.1 U.S. Banks Model

This document outlines the validation results for the RiskCalc v3.1 U.S. Banks model, and highlights the deteriorating financial ratios present in the banking sector. We contrast trends of key risk measures to those of the savings and loan crisis of the late 1980s and early 1990s. We also explore the speed and nature of recent bank failures and demonstrate the model?s strong performance in light of this rapidly changing environment.

October 2009 Pdf Dr. Douglas Dwyer, Daniel Eggleton
Whitepaper

Level and Rank Order Validation of RiskCalc v3.1 United States

In this paper, we validate the Moody's KMV RiskCalc v3.1 United States private firm default model. We show that the EDF™ (Expected Default Frequency) produced by the model continues to rank order risk effectively by providing substantial discriminatory power across multiple cuts of the data.

September 2009 Pdf Dr. Douglas Dwyer, Daniel Eggleton
Whitepaper

Valuation of Corporate Loans: A Credit Migration Approach

Banks and investors in loan assets have always had difficulty obtaining an unbiased and consistent value for the assets they hold. With the growth of liquidity in the loan market, the demand for a valuation method that can be consistently applied has been growing. However, the problems of loan valuation are complex. In large part this is because of the existence of embedded options and contractual conditions that can significantly affect the value of a loan. In this paper, we present the Moody's KMV methodology for valuing corporate loans, taking into account both embedded options and credit state contingent cash flows. We have found that our valuation and risk measurement methodologies compare extremely well to quotes from the secondary loan market, making their use in broad portfolios with limited secondary market prices both feasible and valuable.

January 2008 Pdf Deepak Agrawal, Dr. Douglas Dwyer, Irina Korablev
Whitepaper

The Distribution of Defaults and Bayesian Model Validation

Quantitative rating systems are increasingly being used for the purposes of capital allocation and pricing credits. For these purposes, it is important to validate the accuracy of the probability of default (PD) estimates generated by the rating system and not merely focus on evaluating the discriminatory power of the system. The validation of the accuracy of the PD quantification has been a challenge, fraught with theoretical difficulties (mainly, the impact of correlation) and data issues (eg, the infrequency of default events).

July 2007 Pdf Dr. Douglas Dwyer
Whitepaper

EDF™ 8.0 Model Enhancements

The Moody's KMV Expected Default Frequency model of public firms is the pioneering implementation of a structural model that gives investors the ability to monitor credit risk across a broad range of firms. The release of the EDF™ 8.0 model represents a major recalibration of the model, which incorporates both a larger default dataset and improved estimation techniques that derive the EDF term structure from credit migration.

January 2007 Pdf Dr. Douglas Dwyer, Shisheng Qu
Whitepaper

Inferring the Default Rate in a Population by Comparing Two Incomplete Default Databases

Default databases play a key role in the development, validation and application of credit models. Nevertheless, it has often been difficult to ascertain the extent to which these databases accurately capture all of the default events that have occurred over a particular time period or market segment. While it is generally understood that not all default events are captured in any one dataset, estimates of the magnitude of missed defaults are previously non-existent (to our knowledge) even though such information is extremely valuable for credit risk management.

October 2005 Pdf Dr. Douglas Dwyer, Roger Stein
Whitepaper

Examples of Overfitting Encountered When Building Private Firm Default Prediction Models

The key to building default prediction models, if they are to be incorporated into credit risk management systems, is to build the most powerful model possible subject to the constraints that it is transparent, usable, and intuitive. In this process, we must constantly be on guard for whether or not we have overfit the data.

May 2005 Pdf Dr. Douglas Dwyer
Whitepaper

Moody's KMV RiskCalc® V3.1 Model: Next-Generation Technology for Predicting Private Firm Credit Risk

This white paper outlines the methodology, performance, and key economic benefits of the Moody's KMV EDF™ (Expected Default Frequency™) RiskCalc model, which powers the next-generation of default prediction technology for middle market, private firms.

April 2004 Pdf Dr. Douglas Dwyer, Ahmet Kocagil, Roger Stein