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Bootstrap Hypothesis Tests in Credit Risk

The document discusses the application of bootstrapping in credit risk modeling, highlighting its advantages such as flexibility and lack of distributional assumptions, while also noting its computational intensity and accuracy concerns with small sample sizes. It provides examples of hypothesis testing using bootstrapping, including the Population Stability Index, Herfindahl-Hirschman Index, and Area Under Curve, with visualizations and p-values for each case. Overall, bootstrapping is presented as a valuable tool for testing metrics in credit risk where traditional methods may fall short.

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Nicolás Leonardo Adriazola Román
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11 views5 pages

Bootstrap Hypothesis Tests in Credit Risk

The document discusses the application of bootstrapping in credit risk modeling, highlighting its advantages such as flexibility and lack of distributional assumptions, while also noting its computational intensity and accuracy concerns with small sample sizes. It provides examples of hypothesis testing using bootstrapping, including the Population Stability Index, Herfindahl-Hirschman Index, and Area Under Curve, with visualizations and p-values for each case. Overall, bootstrapping is presented as a valuable tool for testing metrics in credit risk where traditional methods may fall short.

Uploaded by

Nicolás Leonardo Adriazola Román
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Bootstrap Hypothesis Tests in Credit Risk

Andrija Djurovic

[Link]/in/andrija-djurovic

Andrija Djurovic Bootstrap Hypothesis Tests 1/5


Bootstrapping in Credit Risk

Generally underutilized in the credit risk area.


Bootstrapping finds application across various domains within credit risk modeling.
Particularly useful for testing metrics where there is little consensus on the standard error of the estimate
or when statistical testing procedures are absent.
Various methods exist for calculating bootstrap confidence intervals and p-values, with the percentile
method likely being the most commonly used. Computing the p-value is not always straightforward
because bootstrapping does not produce data conforming to the null hypothesis.
Advantages:
does not rely on any distributional assumption
flexible application across a wide range of metrics
useful for identifying bias
easy to implement.
Disadvantages:
computational intensity
assumption of independence (although this can be addressed to a certain extent)
accuracy concerns for smaller sample sizes.
The examples from the following slides demonstrate the percentile method with centered values as:
estimate - bootstrapped distribution + null hypothesis value and with the p-value
calculated as a percentage of more extreme values than the estimate.

Andrija Djurovic Bootstrap Hypothesis Tests 2/5


Example 1: Population Stability Index (1-sided test)
Dataset: Testing Hypothesis:
## Bin Base cnt. Base pct. Target cnt. Target pct. PSI H0 : PSI ≤ 0.15
## 1 1 119 0.22 155 0.35 0.18
## 2 2 130 0.24 139 0.31 0.18
## 3 3 39 0.07 24 0.05 0.18
## 4 4 263 0.48 131 0.29 0.18

Visualization: p-value:

Centered Bootstrapped PSI Values ## [1] "21.26%"


PSI > 0.15 PSI <= 0.15

300

200
Counts

100

0.0 0.1 0.2


PSI

Andrija Djurovic Bootstrap Hypothesis Tests 3/5


Example 2: Herfindahl-Hirschman Index (1-sided test)
Dataset: Testing Hypothesis:
## Rating Grade # obs. DR HHI H0 : HHI ≥ 0.20
## 1 01 (-Inf,0.0199) 202 0.01 0.194
## 2 02 [0.0199,0.0263) 54 0.02 0.194
## 3 03 [0.0263,0.0369) 96 0.03 0.194
## 4 04 [0.0369,0.0903) 204 0.06 0.194
## 5 05 [0.0903,0.15) 103 0.11 0.194
## 6 06 [0.15,0.197) 41 0.12 0.194
## 7 07 [0.197,Inf) 50 0.32 0.194

Visualization: p-value:

Centered Bootstrapped HHI Values ## [1] "23.72%"


HHI >= 0.2 HHI < 0.2

300

200
Counts

100

0.18 0.19 0.20 0.21 0.22


HHI

Andrija Djurovic Bootstrap Hypothesis Tests 4/5


Example 3: Area Under Curve (2-sided test)

Dataset: Testing Hypothesis:

Development sample AUC 79%. Application portfolio AUC 75.2%. H0 : AUC = 0.79

Visualization: p-value:

Centered Bootstrapped AUC Values 2*min(c(left-side p-value,


AUC <= 0.79 AUC >= 0.79 right-side p-value))

600
## [1] "2.06%"

400
Counts

200

0.76 0.80 0.84


AUC

Andrija Djurovic Bootstrap Hypothesis Tests 5/5

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