The ROC (Receiver Operating Characteristic) Curve and associated Gini Coefficient are commonly used methods of measuring a model’s efficacy at determining separation between two groups, in this case, defaulters and survivors. The yellow trend represents the performance of RapidRatings’ FHR at issuing ratings in the higher risk level rating categories for companies which default within a time horizon versus issuing ratings in lower risk rating categories for companies which do not default within the time horizon. If a model randomly allocated ratings to defaulters and survivors, it would plot along the grey trend line. The RapidRatings model aspires to perfectly discriminate ‘good’ versus ‘bad’ companies and the Gini Coefficient is a measure of the extent to which this is achieved. The Gini Coefficient for a random model would be 0 and the Gini Coefficient for a perfect model would be 1.
In constructing the ROC Curve, RapidRatings employs a methodology that includes all ratings issued during the time period for the ‘Universe’ sample, and all ratings which were issued during the time period and within 12 months of default are included in the Defaulter sample for the 1-year Gini (or within 36 months for the 3-year Gini). Figures 1 and 2 present the one-year and three-year ROC curves, Gini Coefficients, and AUROC (Area Under the Receiver Operating Characteristic) index (Gini = 2 × AUROC − 1).
