The multi-state latent factor intensity model for credit rating transitions
Abstract
A new empirical reduced-form model for credit rating transitions is introduced. It is a parametric intensity-based duration model with multiple states and driven by exogenous covariates and latent dynamic factors. The model has a generalized semi-Markov structure designed to accommodate many of the stylized facts of credit rating migrations. Parameter estimation is based on Monte Carlo maximum likelihood methods for which the details are discussed in this paper. A simulation experiment is carried out to show the effectiveness of the estimation procedure. An empirical application is presented for transitions in a 7 grade rating system. The model includes a common dynamic component that can be interpreted as the credit cycle. Asymmetric effects of this cycle across rating grades and additional semi-Markov dynamics are found to be statistically significant. Finally, we investigate whether the common factor model suffices to capture systematic risk in rating transition data by introducing multiple factors in the model.(This abstract was borrowed from another version of this item.)
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Bibliographic Info
Article provided by Elsevier in its journal Journal of Econometrics.
Volume (Year): 142 (2008)
Issue (Month): 1 (January)
Pages: 399-424
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Handle: RePEc:eee:econom:v:142:y:2008:i:1:p:399-424
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Web page: http://www.elsevier.com/locate/jeconom
For corrections or technical questions regarding this item, or to correct its listing, contact: (Jeroen Loos).
Related research
Keywords:Other versions of this item:
- Siem Jan Koopman & André Lucas & André Monteiro, 2005. "The Multi-State Latent Factor Intensity Model for Credit Rating Transitions," Tinbergen Institute Discussion Papers 05-071/4, Tinbergen Institute, revised 04 Jul 2005.
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Longitudinal Data; Spatial Time Series
- C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
- C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
References
References listed on IDEASPlease report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Van den Berg, Gerard J., 2000.
"Duration Models: Specification, Identification, and Multiple Durations,"
MPRA Paper
9446, University Library of Munich, Germany.
- Van den Berg, Gerard J., 2001. "Duration models: specification, identification and multiple durations," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 5, chapter 55, pages 3381-3460 Elsevier.
Citations
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.Cited by:
- Nikolaus Hautsch, 2007.
"Capturing Common Components in High-Frequency Financial Time Series: A Multivariate Stochastic Multiplicative Error Model,"
CFS Working Paper Series
2007/25, Center for Financial Studies.
- Hautsch, Nikolaus, 2008. "Capturing common components in high-frequency financial time series: A multivariate stochastic multiplicative error model," Journal of Economic Dynamics and Control, Elsevier, vol. 32(12), pages 3978-4015, December.
- Nikolaus Hautsch, 2007. "Capturing Common Components in High-Frequency Financial Time Series: A Multivariate Stochastic Multiplicative Error Model," SFB 649 Discussion Papers SFB649DP2007-052, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
- Drew Creal & Siem Jan Koopman & André Lucas, 2008.
"A General Framework for Observation Driven Time-Varying Parameter Models,"
Tinbergen Institute Discussion Papers
08-108/4, Tinbergen Institute.
- Drew Creal & Siem Jan Koopman & Andre Lucas, 2009. "A General Framework for Observation Driven Time-Varying Parameter Models," Global COE Hi-Stat Discussion Paper Series gd08-038, Institute of Economic Research, Hitotsubashi University.
- Monteiro, André A., .
"The econometrics of randomly spaced financial data: a survey,"
Open Access publications from Universidad Carlos III de Madrid
info:hdl:10016/5995, Universidad Carlos III de Madrid.
- Andre A. Monteiro, 2009. "The econometrics of randomly spaced financial data: a survey," Statistics and Econometrics Working Papers ws097924, Universidad Carlos III, Departamento de Estadística y Econometría.
- Luc Bauwens & Nikolaus Hautsch, 2007.
"Modelling Financial High Frequency Data Using Point Processes,"
SFB 649 Discussion Papers
SFB649DP2007-066, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
- Luc, BAUWENS & Nikolaus, HAUTSCH, 2006. "Modelling Financial High Frequency Data Using Point Processes," Discussion Papers (ECON - Département des Sciences Economiques) 2006039, Université catholique de Louvain, Département des Sciences Economiques.
- BAUWENS, Luc & HAUTSCH, Nikolaus, 2006. "Modelling financial high frequency data using point processes," CORE Discussion Papers 2006080, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Chew Lian Chua & G. C. Lim & Penelope Smith, 2008. "A Bayesian Simulation Approach to Inference on a Multi-State Latent Factor Intensity Model," Melbourne Institute Working Paper Series wp2008n16, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
- Fuertes, Ana-Maria & Kalotychou, Elena, 2007.
"On sovereign credit migration: A study of alternative estimators and rating dynamics,"
Computational Statistics & Data Analysis,
Elsevier, vol. 51(7), pages 3448-3469, April.
- Elena Kalotychou & Ana-Maria Fuertes, 2006. "On Sovereign Credit Migration: A Study of Alternative Estimators and Rating Dynamics," Computing in Economics and Finance 2006 509, Society for Computational Economics.
- Siem Jan Koopman & André Lucas & Bernd Schwaab, 2008. "Forecasting Cross-Sections of Frailty-Correlated Default," Tinbergen Institute Discussion Papers 08-029/4, Tinbergen Institute.
- Chew Lian Chua & Robert Dixon & G. C. Lim, 2007. "What Drives Worker Flows?," Melbourne Institute Working Paper Series wp2007n34, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
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