FRM: Logistic distribution maps credit score to probability of default (PD)

The logistic function can be used to transform a credit score into a probability of default (PD). The advantages of the logistic are (i) it easy to calculate and (ii) as a cumulative distribution function (CDF) the output is, appropriately, a probability between 0 and 1.0. In this video, I show two approaches to the exponent, which itself is the negative of a product of vectors (-b*x). First, the two-factor linear probability model that produces a "credit score;" the credit score is then transformed into a PD. Second, an illustrated usage which starts with "internal credit ratings" from 0 to 100, with 100 representing perfect credit quality; in this case, the internal credit rating is adjusted to a scale usable to the logistic, then the logistic function is again used to compute a PD. For more financial risk videos, visit our website! www.bionicturtl...

[@dariogambi]

you saved me. I was stuck with my exam in econometrics and this solved !

[@lexunajinrui1340]

When you have a negative Ebit and negative Equity the result is strange how ti correct that?

[@eleimongonis]

I know it might sound naive, but how would one map the lowest internal rating scale (10 in your example) to a PD of close to 100%? The way I interpret the internal rating mapping in your example above is that the highest PD is 50%, not really 100%. Please, advise

[@stanislavstanislavsky2228]

Correct me if Im wrong, but in this video "Score" is actually logodds

[@haowang5935]

Yes, it is

[@rnparks]

where does the consant and -8/-2 come from?

[@syedadeelhussain2691]

goal seek in excel

[@njabulompofu]

please add a link to your website so we can access the spreadsheet

[@USMANAKBARSunny]

www.bionicturtle.com/