Pitfalls and Remedies in Testing the Calibration Quality of Rating Systems

41 Pages Posted: 24 Aug 2009 Last revised: 5 Nov 2009

See all articles by Wolfgang Aussenegg

Wolfgang Aussenegg

Vienna University of Technology

Florian Resch

Oesterreichische Nationalbank (OeNB)

Gerhard Winkler

Oesterreichische Nationalbank (OeNB); Vienna University of Economics and Business Administration

Date Written: November 4, 2009

Abstract

Testing calibration quality by means of backtesting is an integral part in the validation of credit rating systems. Against this background this paper provides a comprehensive overview of existing testing procedures. We study the procedures'deficiencies theoretically and illustrate their impact empirically. Based on the insights gained thereof, we develop enhanced hybrid testing procedures which turn out to be superior to the commonly applied methods. We also propose computationally efficient algorithms for our calibration tests. Finally, we are able to demonstrate empirically that our method outperforms existing tests in a scenario analysis using rating data of Moody's.

Keywords: Rating System, Validation, Calibration Quality

JEL Classification: G20, C49

Suggested Citation

Aussenegg, Wolfgang and Resch, Florian and Winkler, Gerhard, Pitfalls and Remedies in Testing the Calibration Quality of Rating Systems (November 4, 2009). 22nd Australasian Finance and Banking Conference 2009, Available at SSRN: https://ssrn.com/abstract=1460773 or http://dx.doi.org/10.2139/ssrn.1460773

Wolfgang Aussenegg

Vienna University of Technology ( email )

Theresianumgasse 27
Vienna, A-1040
Austria
+43 1 58801 33082 (Phone)
+43 1 58801 33098 (Fax)

HOME PAGE: http://www.imw.tuwien.ac.at/fc/people/wolfgang_aussenegg/

Florian Resch (Contact Author)

Oesterreichische Nationalbank (OeNB) ( email )

Otto-Wagner-Platz 3, PO Box 61
Vienna,
1010 Vienna, A-1011
Austria

Gerhard Winkler

Oesterreichische Nationalbank (OeNB) ( email )

Otto-Wagner-Platz 3
1090 Vienna
Austria

Vienna University of Economics and Business Administration ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

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