Abstract:
The event of a default for low-default portfolios, such as sovereign debt or banks, have received
much attention as a result of the increasing instabilities in financial markets. The lack
of sufficient default information on low-default portfolios complicates the protection of such
portfolios. Default protections have typically, in the past, relied on extreme value theory and
reporting the value at risk. The focus here, is the application of an engineering concept, accelerated
test techniques, to the problem of insufficient data on low-default portfolios. In the
application, high-default portfolios serve as stressed cases of low-default portfolios. Since
high-default portfolios have more data available, viewing it as a stressed case of a low-default
portfolio enables us to extrapolate the data to the low-default portfolio environment, and do
estimation such as estimating the default probability for a low-default portfolio. The flexible
framework through which the above is achieved, is provided.
