Rating Based Modeling of Credit Risk

Chapter 2. Rating and Scoring Techniques

This chapter aims to provide an overview on rating agencies, the rating process, scoring techniques, and how rating systems can be evaluated. Hereby, after a brief look at some of the major rating agencies, different qualitative and quantitative techniques for credit scoring will be described. The focus will be set on the classic methods of discriminant analysis, probit, and logit models. The former was initially suggested in the seminal paper by Altman (1968) and after four decades is still an often-used tool for determining the default risk of a company. Further we will illustrate how the quality of rating systems can be evaluated by using accuracy ratios.

2.1. Ratings Agencies, Rating Processes, and ...