Calibrating 15 month Probability of Default (PD) to 12 month PD

[Siddharth123]

Hello All,

I am running PROC LOGISTIC with dependant variable as if the customer defualted in the next 15 months. I would now like to calibrate it to 12 month PD.

Could you kindly advise me how can I do it, are there any discussion forums on this or any paper that I can refer to?

Kind regards

Sid

[M_Maldonado]

Hey Sid,

Since you are going from 15 to 12 months you might not need to calibrate your model as long as 12 months holds as a good prediction window.

Are you familiar with vintage analysis? If not, Naeem Siddiqi explains it in two pages in his book Credit Risk Scorecards: Developing and Implementing Intelligent Credit Scoring.

It is a must-read for Credit Scoring. It is very concise and easy to follow.

The idea is pretty simple. Based on the cummulative bad rate, you can confirm if it makes to reduce the prediction window from 15 to 12 months.

Another alternative, run a survival analysis using as input the same groupings from your scorecard, and determine from the hazard function if 15 months or 12 months are a better or similar prediction window.

Good luck!

-Miguel

[Siddharth123]

Thanks Miguel, this is really helpful. I do have Naeem Siddiqui book and familiar with vintage analysis. I understand your ideas