JSM 2011 Online Program

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Abstract Details

Activity Number: 360
Type: Contributed
Date/Time: Tuesday, August 2, 2011 : 10:30 AM to 12:20 PM
Sponsor: Business and Economic Statistics Section
Abstract - #302500
Title: Measures of the Economic Value of Bankruptcy Probabilities
Author(s): David Johnstone and Stewart Jones and Maurice Peat and Victor Richmond Jose*+
Companies: University of Sydney and University of Sydney and University of Sydney and Georgetown University
Address: , Washington, DC, 20057,
Keywords: Scoring Rules ; Forecast Evaluation ; Bankruptcy Probability ; Default Risk
Abstract:

Financial institutions and regulatory agencies direct much effort and expertise towards estimating bankruptcy probabilities. By comparison, the techniques used to evaluate probability estimates have attracted little attention and still remain mostly ad hoc. We introduce a family of economic probability score functions designed to capture the utility obtained by a user, with a specified utility function, who uses the estimated probabilities to make hypothetical bets against a rival forecaster or model. The conceptual appeal of these statistical score functions is that probability forecasts are evaluated neither in abstract, nor in isolation, but instead by whether they would have "made money" for a given user, with specified risk aversion, against comparable forecasts or market betting prices.


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