Economic Adjustment of Default Probabilities

  • Tomáš Vaněk
Keywords: credit risk, probability of default, economic adjustment, economic forecast, IFRS 9

Abstract

This paper proposes a straightforward and intuitive computational mechanism for economic adjustment of default probabilities, allowing to extend original (usually one-year) probability of default estimates for more than one period ahead. The intensity of economic adjustment can be flexibly modified by setting the appropriate weighting parameter. The proposed mechanism is designed to be useful especially in the context of lifetime expected credit losses calculation within the IFRS 9 requirements.

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Published
2016-12-30
Section
Articles