ScoreProbabilityAlignment

Analyzes the alignment between credit scores and predicted probabilities.

Purpose

The Score-Probability Alignment test evaluates how well credit scores align with predicted default probabilities. This helps validate score scaling, identify potential calibration issues, and ensure scores reflect risk appropriately.

Test Mechanism

The test: 1. Groups scores into bins 2. Calculates average predicted probability per bin 3. Tests monotonicity of relationship 4. Analyzes probability distribution within score bands

Signs of High Risk

• Non-monotonic relationship between scores and probabilities
• Large probability variations within score bands
• Unexpected probability jumps between adjacent bands
• Poor alignment with expected odds-to-score relationship
• Inconsistent probability patterns across score ranges
• Clustering of probabilities at extreme values
• Score bands with similar probability profiles
• Unstable probability estimates in key decision bands

Strengths

• Direct validation of score-to-probability relationship
• Identifies potential calibration issues
• Supports score band validation
• Helps understand model behavior
• Useful for policy setting
• Visual and numerical results
• Easy to interpret
• Supports regulatory documentation

Limitations

• Sensitive to bin selection
• Requires sufficient data per bin
• May mask within-bin variations
• Point-in-time analysis only
• Cannot detect all forms of miscalibration
• Assumes scores should align with probabilities
• May oversimplify complex relationships
• Limited to binary outcomes