From Power Curves to Discriminative Power: Measuring Model Performance of LGD Models

22 Pages Posted: 20 Apr 2017

See all articles by Robert Frontczak

Robert Frontczak

Landesbank Baden-Württemberg (LBBW)

Michael Jaeger

Landesbank Baden-Württemberg (LBBW)

Bernd Schumacher

Landesbank Baden-Württemberg (LBBW)

Date Written: April 18, 2017

Abstract

Measuring model performance of rating systems is a major task for banks. The concept of discrimination, i.e. the discriminative power, is used in credit risk modeling to assess the quality of a risk model concerning the separation of extreme events. For PD models CAP (Cumulative Accuracy Profile ) or ROC (Receiver Operating Characteristic) curves are used to build a quantity called Accuracy Ratio, which is used to measure the discriminative power. These ideas are well known and broadly used in practice. Although such a measure is also desirable for models of the loss given default (LGD models), it is not documented in the literature. In this note we close this gap. We develop a measure for the discriminative power of LGD models based on Lorenz curves. We study first properties and introduce some alternatives for its calculation from a practical point of view.

Keywords: LGD Model, Discriminative Power, Lorenz Curve, Gini Index, Validation

JEL Classification: G21, C52

Suggested Citation

Frontczak, Robert and Jaeger, Michael and Schumacher, Bernd, From Power Curves to Discriminative Power: Measuring Model Performance of LGD Models (April 18, 2017). Available at SSRN: https://ssrn.com/abstract=2954757 or http://dx.doi.org/10.2139/ssrn.2954757

Robert Frontczak (Contact Author)

Landesbank Baden-Württemberg (LBBW) ( email )

Kleiner SchloBplatz 11
D-70173 Stuttgart, 70174
Germany

Michael Jaeger

Landesbank Baden-Württemberg (LBBW) ( email )

Kleiner SchloBplatz 11
D-70173 Stuttgart, 70174
Germany

Bernd Schumacher

Landesbank Baden-Württemberg (LBBW) ( email )

Kleiner SchloBplatz 11
D-70173 Stuttgart, 70174
Germany

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