Default Probability Table

From Open Risk Manual

Definition

A Default Probability Table (DPT) is a mapping from Credit Score ranges or Credit Ratings to a Probability of Default.

Credit Score DPT

A continuous score DPT are defined via:

  • the number of score ranges
  • the boundaries of the score ranges

Credit Rating DPT

A Credit Rating System DPT is simply a map from rating classes to default probabilities

Example

A hypothetical mapping table for a credit score system producing scores from 0 to 1000 which is being mapped to 10 distinct probabilities of default

Credit Score Range Probability of Default
910 and above 0.2%
810 - 900 1.0%
710 - 800 2.0%
610 - 700 4.0%
510 - 600 5.0%
410 - 500 6.0%
310 - 400 10.0%
210 - 300 12.5%
110 - 200 15.0%
Below 100 20.0%

Issues and Challenges

  • A default probability table is effectively a Risk Model, that is, it predicts the likelihood of certain events according implied Model Assumptions (for example the selection of ranges). As such it is distinct from the Empirical Transition Matrix that expresses the actually realized event rates for score ranges or rating categories

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