Credit Risk Models Exposed: Bias, Instability, and Gaming Uncovered
The article explores how to estimate the likelihood of borrowers defaulting on loans based on their credit ratings. This information is crucial for financial institutions to manage risks effectively. The researchers looked at different methods used to calculate these default probabilities and found some issues like bias and instability. By using multiple methods carefully, accurate estimates can be obtained. The study also revealed insights into the differences between internal and rating agency credit ratings.