An Urn-Based Nonparametric Modeling of the Dependence between PD and LGD with an Application to Mortgages
Dan Cheng (TU Delft - Electrical Engineering, Mathematics and Computer Science)
Pasquale Cirillo (TU Delft - Electrical Engineering, Mathematics and Computer Science)
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Abstract
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’ judgements, and for the constant update of this information over time, every time new data are available. A real-world application on mortgages is described using the Single Family Loan-Level Dataset by Freddie Mac.
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