A Calibration Segment in the context of Risk Model development is a uniquely identified subset of exposures under the scope of application of the model which is jointly calibrated. . A calibration segment is thus the collection of rating grades or rated pools subjected to the same statistical calibration analysis.
Where all obligors or exposures within the range of application of the PD or LGD model are jointly calibrated, the whole scope of application of the model is considered one calibration segment
Institutions may split exposures covered by the same PD or LGD model into as many different calibration segments as needed where one or more subsets of these exposures carry a significantly different level of risk. For this purpose institutions should use relevant segmentation drivers and they should justify and document the use and scope of the calibration segments.
Where institutions use a continuous rating scale in the LGD estimation, they may create a separate calibration segment for such exposures that tend to exhibit above 100% recovery
- EBA Guidelines on PD estimation, LGD estimation and the treatment of defaulted exposures, Nov 2017