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1: User's Guide
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Statistical Measures Used in Basel II Reports
Overview of Statistical Measures Used for Basel II Reports
SAS Model Manager Basel II reports use several statistical measures to validate the stability, performance, and
calibration for the two key types of Basel II risk models: the Probability of Default (PD) model and the Loss Given
Default (LGD) model.
The statistical measures for model validation are grouped into three categories:
Category Description
Model Tracks the change in distribution of the modeling data and scoring data.
Stability
Model
Measures the ability of a model to discriminate between customers with accounts that have
Performance
defaulted, and customers with accounts that have not defaulted. The score difference
between nondefault and default accounts helps to determine the required cutoff score. The
cutoff score helps to predict whether a credit exposure is a default account.
Measures the relationship between the actual default probability and the predicted default
probability. This helps you to understand the performance of a model over a time period.
Model Checks the accuracy of the PD and LGD models by comparing the correct quantification of the
Calibration risk components with the available standards.
The sections that follow describe the measures, statistics, and tests that are used to create the PD and LGD
reports. For more information about these measures, statistics, and tests, see the SAS Model Manager product
documentation page on support.sas.com.
Model Stability Measure
The following table describes the model stability measure that is used to create the PD report and the LGD reports.
Model Performance Measures and Statistics
The following table describes the model performance measures that are used to create the PD and LGD reports.
correct.
Accuracy AR is the summary index of Cumulative Accuracy Profile (CAP) and is also Yes Yes
Ratio (AR) known as Gini coefficient. It shows the performance of the model that is
being evaluated by depicting the percentage of defaulted accounts that are
captured by the model across different scores.
Area Under AUC can be interpreted as the average ability of the rating model to Yes No
Curve (AUC) accurately classify nondefault accounts and default accounts. It represents
the discrimination between the two populations. A higher area denotes higher
discrimination. When AUC is 0.5, it means that nondefault accounts and
default accounts are randomly classified, and when AUC is 1, it means that
the scoring model accurately classifies nondefault accounts and default
accounts. Thus, the AUC ranges between 0.5 and 1.
Bayesian Error BER is the proportion of the whole sample that is misclassified when the Yes No
Rate (BER) rating system is in optimal use. For a perfect rating model, the BER has a
value of zero. A model's BER depends on the probability of default. The
lower the BER, and the lower the classification error, the better the model.
D Statistic The D Statistic is the mean difference of scores between default accounts Yes No
and nondefault accounts, weighted by the relative distribution of those
scores.
Error Rate The Error Rate is the proportion of the total number of incorrect predictions. Yes No
Information The Information Statistic value is a weighted sum of the difference between Yes No
Statistic (I) conditional default and conditional nondefault rates. The higher the value, the
more likely a model can predict a default account.
Kendall’s Tau Kendall's taub is a nonparametric measure of association based on the Yes No
b number of concordances and discordances in paired observations. Kendall's
tau values range between 1 and +1, with a positive correlation indicating that
the ranks of both variables increase together. A negative association
indicates that as the rank of one variable increases, the rank of the other
variable decreases.
Kullback KL is a nonsymmetric measure of the difference between the distributions of Yes No
Leibler default accounts and nondefault accounts. This score has similar properties
Statistic (KL) to the information value.
Kolmogorov KS is the maximum distance between two population distributions. This Yes No
Smirnov statistic helps discriminate default accounts from nondefault accounts. It is
Statistic (KS) also used to determine the best cutoff in application scoring. The best cutoff
maximizes KS, which becomes the best differentiator between the two
populations. The KS value can range between 0 and 1, where 1 implies that
the model is perfectly accurate in predicting default accounts or separating
the two populations. A higher KS denotes a better model.
1–PH Statistic 1PH is the percentage of cumulative nondefault accounts for the cumulative Yes No
(1–PH) 50% of the default accounts.
Mean Square MSE, MAD, and MAPE are generated for LGD reports. These statistics No Yes
Error (MSE), measure the differences between the actual LGD and predicted LGD.
Mean Absolute
Deviation
(MAD), and
Mean Absolute
Percent Error
(MAPE)
Pietra Index The Pietra Index is a summary index of Receiver Operating Characteristic Yes No
(ROC) statistics because the Pietra Index is defined as the maximum area of
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a triangle that can be inscribed between the ROC curve and the diagonal of
the unit square.
The Pietra Index can take values between 0 and 0.353. As a rating model's
performance improves, the value is closer to 0.353. This expression is
interpreted as the maximum difference between the cumulative frequency
distributions of default accounts and nondefault accounts.
Precision Precision is the proportion of the actual default accounts among the predicted Yes No
default accounts.
Sensitivity Sensitivity is the ability to correctly classify default accounts that have Yes No
actually defaulted.
Somers’ D (p Somers' D is a nonparametric measure of association that is based on the Yes No
value) number of concordances and discordances in paired observations. It is an
asymmetric modification of Kendall's tau. Somers' D differs from Kendall’s
tau in that it uses a correction only for pairs that are tied on the independent
variable. Values range between 1 and +1. A positive association indicates
that the ranks for both variables increase together. A negative association
indicates that as the rank of one variable increases, the rank of the other
variable decreases.
Specificity Specificity is the ability to correctly classify nondefault accounts that have Yes No
not defaulted.
Validation The Validation Score is the average scaled value of seven distance Yes No
Score measures, anchored to a scale of 1 to 13, lowest to highest. The seven
measures are the mean difference (D), the percentage of cumulative non
default accounts for the cumulative 50% of the default accounts (1PH), the
maximum deviation (KS), the Gini coefficient (G), the Information Statistic (I),
the Area Under the Curve (AUC), or Receiver Operating Characteristic
(ROC) statistic, and the KullbackLeibler statistic (KL).
Model Calibration Measures and Tests
The following table describes the model calibration measures and tests that are used to create the PD and LGD
reports:
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For the Loss Given Default (LGD) report, confidence intervals are based on the
poollevel average of the estimated LGD, plus or minus the poollevel standard
deviation, and multiplied by the 1(alpha/2) quantile of the standard normal
distribution.
Correlation The model validation report for LGD provides a correlation analysis of the No Yes
Analysis estimated LGD with the actual LGD. This correlation analysis is an important
measure for a model’s usefulness. The Pearson correlation coefficients are
provided at the pool and overall levels for each time period are examined.
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