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| Testing Rating Accuracy by Bernd Engelmann of Deutsche Bundesbank, January 2003 Abstract: The most popular validation technique currently used in practice is the cumulative accuracy profile (CAP) and its summary statistic, the accuracy ratio. A detailed explanation of this method can be found in Sobehart, Keenan & Stein (2000). The receiver operating characteristic (ROC) is a similar concept to the CAP. This method has its origin in signal detection theory, psychology and, especially, in medicine (see, for example, Hanley & McNeil, 1982). Sobehart & Keenan (2001) explain how to use this concept for validating internal rating models. In their article, they concentrate on the qualitative features of ROC curves such as calculation and interpretation. The main conclusion of their article is that the size of the area below an ROC curve is an indicator of the quality of a rating model. Published in: RISK, Vol. 16, (January 2003), pp. 82-86. This paper is republished as Ch.11 in…
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