Portfolio Stability Index

Definition

Portfolio Stability Index (PSI, more general: Population Stability Index) is a measure of the divergence of frequency distributions between two samples (typically over time)

Usage

The index is used to measure the divergence between a development sample and the current portfolio as part of monitoring or Credit Scorecard Validation.

Formula

$\mbox{PSI} = \sum_i (\frac{A_i}{A_T} - \frac{M_i}{M_T}) log(\frac{\frac{A_i}{A_T}}{\frac{M_i}{M_T}})$

where

• $i$ is the i-th Credit Score band
• $A_i$ is actual default rate for class i
• $M_i$ is modelled default rate for class i
• $A_T, M_T$ are the total actual and modelled default rates respectively

See Also

• Information Statistic