An Urn-Based Nonparametric Modeling of the Dependence between PD and LGD with an Application to Mortgages

We propose an alternative approach to the modeling of the positive dependence between the probability of default and the loss given default in a portfolio of exposures, using a bivariate urn process. The model combines the power of Bayesian nonparametrics and statistical learning, allowing for the elicitation and the exploitation of experts’...