The Analytics of Risk Model Validation

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Analytic models of the ROC Curve

Applications to credit rating model validation

Stephen Satchell*; Wei Xia^†,‡* Faculty of Economics, University of Cambridge and Trinity College, Cambridge, UK^† Doctoral Student, Birkbeck College, University of London, UK^‡ Visiting Lecturer, University of International Business and Economics, Beijing, China

Abstract

In this chapter, the authors use the concept of the population receiver operating characteristic (ROC) curve to build analytic models of ROC curves. Information about the population properties can be used to gain greater accuracy of estimation relative to the non-parametric methods currently in vogue. If used properly, this is particularly helpful in some situations where the number of sick loans is rather ...