The ordered qualitative model for credit rating transitions
AbstractInformation on the expected changes in credit quality of obligors is contained in credit migration matrices which trace out the movements of firms across ratings categories in a given period of time and in a given group of bond issuers. The rating matrices provided by Moodyâs, Standard &Poorâs and Fitch became crucial inputs to many applications, including the assessment of risk on corporate credit portfolios (CreditVar) and credit derivatives pricing. We propose a factor probit model for modeling and prediction of credit rating matrices that are assumed to be stochastic and driven by a latent factor. The filtered latent factor path reveals the effect of the economic cycle on corporate credit ratings, and provides evidence in support of the PIT (point-in-time) rating philosophy. The factor probit model also yields the estimates of cross-sectional correlations in rating transitions that are documented empirically but not fully accounted for in the literature and in the regulatory rules established by the Basle Committee.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Journal of Empirical Finance.
Volume (Year): 15 (2008)
Issue (Month): 1 (January)
Contact details of provider:
Web page: http://www.elsevier.com/locate/jempfin
Other versions of this item:
- Joan Jasiak & D. Feng & C. Gourieroux, 2006. "The Ordered Qualitative Model For Credit Rating Transitions," Working Papers 2006_2, York University, Department of Economics.
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
- C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
Please 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.:
- Rosch, Daniel, 2005. "An empirical comparison of default risk forecasts from alternative credit rating philosophies," International Journal of Forecasting, Elsevier, vol. 21(1), pages 37-51.
- Crouhy, Michel & Galai, Dan & Mark, Robert, 2001. "Prototype risk rating system," Journal of Banking & Finance, Elsevier, vol. 25(1), pages 47-95, January.
- Pamela Nickell & William Perraudin & Simone Varotto, 2001.
"Stability of ratings transitions,"
Bank of England working papers
133, Bank of England.
- Merton, Robert C., 1973.
"On the pricing of corporate debt: the risk structure of interest rates,"
684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-70, May.
- Bangia, Anil & Diebold, Francis X. & Kronimus, Andre & Schagen, Christian & Schuermann, Til, 2002.
"Ratings migration and the business cycle, with application to credit portfolio stress testing,"
Journal of Banking & Finance,
Elsevier, vol. 26(2-3), pages 445-474, March.
- Anil Bangia & Francis X. Diebold & Til Schuermann, 2000. "Ratings Migration and the Business Cycle, With Application to Credit Portfolio Stress Testing," Center for Financial Institutions Working Papers 00-26, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Treacy, William F. & Carey, Mark, 2000. "Credit risk rating systems at large US banks," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 167-201, January.
- Gordy, Michael B., 2000.
"A comparative anatomy of credit risk models,"
Journal of Banking & Finance,
Elsevier, vol. 24(1-2), pages 119-149, January.
- Albanese, Claudio & Chen, Oliver X., 2006. "Implied migration rates from credit barrier models," Journal of Banking & Finance, Elsevier, vol. 30(2), pages 607-626, February.
- Cheung, S., 1996. "Provincial Credit Rating in Canada: An Ordered Probit Analysis," Working Papers 96-6, Bank of Canada.
- Loffler, Gunter, 2004. "An anatomy of rating through the cycle," Journal of Banking & Finance, Elsevier, vol. 28(3), pages 695-720, March.
- Michael B. Gordy, 2002.
"A risk-factor model foundation for ratings-based bank capital rules,"
Finance and Economics Discussion Series
2002-55, Board of Governors of the Federal Reserve System (U.S.).
- Gordy, Michael B., 2003. "A risk-factor model foundation for ratings-based bank capital rules," Journal of Financial Intermediation, Elsevier, vol. 12(3), pages 199-232, July.
- Rösch, Daniel, 2003. "Correlations and Business Cycles of Credit Risk: Evidence from Bankruptcies in Germany," University of Regensburg Working Papers in Business, Economics and Management Information Systems 380, University of Regensburg, Department of Economics.
- Lando, David & Skodeberg, Torben M., 2002. "Analyzing rating transitions and rating drift with continuous observations," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 423-444, March.
- Duffie, Darrell & Singleton, Kenneth J, 1999. "Modeling Term Structures of Defaultable Bonds," Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 687-720.
- Carey, Mark & Hrycay, Mark, 2001. "Parameterizing credit risk models with rating data," Journal of Banking & Finance, Elsevier, vol. 25(1), pages 197-270, January.
- Irina Peaucelle, 2005. "Dynamic analysis of bankruptcy and economic waves," PSE Working Papers halshs-00590851, HAL.
- Alain Monfort & Jean-Paul Renne, 2013.
"Default, Liquidity, and Crises: an Econometric Framework,"
Journal of Financial Econometrics,
Society for Financial Econometrics, vol. 11(2), pages 221-262, March.
- Alain Monfort & Jean-Paul Renne, 2010. "Default, Liquidity and Crises : An Econometric Framework," Working Papers 2010-46, Centre de Recherche en Economie et Statistique.
- Monfort, A. & Renne, J-P., 2011. "Default, liquidity and crises: an econometric framework," Working papers 340, Banque de France.
- Gourieroux, C. & Jasiak, J., 2012. "Granularity adjustment for default risk factor model with cohorts," Journal of Banking & Finance, Elsevier, vol. 36(5), pages 1464-1477.
- Caporale, Guglielmo Maria & Matousek, Roman & Stewart, Chris, 2012.
"Ratings assignments: Lessons from international banks,"
Journal of International Money and Finance,
Elsevier, vol. 31(6), pages 1593-1606.
- Guglielmo Maria Caporale & Roman Matousek & Chris Stewart, 2009. "Rating Assignments: Lessons from International Banks," Discussion Papers of DIW Berlin 868, DIW Berlin, German Institute for Economic Research.
- Guglielmo Maria Caporale & Roman Matousek & Chris Stewart, 2009. "Rating Assignments: Lessons from International Banks," CESifo Working Paper Series 2618, CESifo Group Munich.
- Dimitris Gavalas & Theodore Syriopoulos, 2014. "Bank Credit Risk Management and Rating Migration Analysis on the Business Cycle," International Journal of Financial Studies, MDPI, Open Access Journal, vol. 2(1), pages 122-143, March.
- Alexander B. Matthies, 2013. "Empirical Research on Corporate Credit-Ratings: A Literature Review," SFB 649 Discussion Papers SFB649DP2013-003, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
- Hwang, Ruey-Ching & Chung, Huimin & Chu, C.K., 2010. "Predicting issuer credit ratings using a semiparametric method," Journal of Empirical Finance, Elsevier, vol. 17(1), pages 120-137, January.
- Guglielmo Maria Caporale & Roman Matousek & Chris Stewart, 2010.
"EU Banks Rating Assignments: Is there Heterogeneity between New and Old Member Countries?,"
Discussion Papers of DIW Berlin
1009, DIW Berlin, German Institute for Economic Research.
- Guglielmo Maria Caporale & Roman Matousek & Chris Stewart, 2011. "EU Banks Rating Assignments: Is There Heterogeneity between New and Old Member Countries?," Review of International Economics, Wiley Blackwell, vol. 19(1), pages 189-206, 02.
- Guglielmo Maria Caporale & Roman Matousek & Chris Stewart, 2010. "EU Banks Rating Assignments: Is there Heterogeneity between New and Old Member Countries?," CESifo Working Paper Series 3074, CESifo Group Munich.
- Chateau, John-Peter D., 2009. "Marking-to-model credit and operational risks of loan commitments: A Basel-2 advanced internal ratings-based approach," International Review of Financial Analysis, Elsevier, vol. 18(5), pages 260-270, December.
- Chan, Ngai Hang & Wong, Hoi Ying & Zhao, Jing, 2012. "Structural model of credit migration," Computational Statistics & Data Analysis, Elsevier, vol. 56(11), pages 3477-3490.
- Gourieroux, C. & Monfort, A., 2008.
"Quadratic stochastic intensity and prospective mortality tables,"
Insurance: Mathematics and Economics,
Elsevier, vol. 43(1), pages 174-184, August.
- Christian Gourieroux & Alain Monfort, 2007. "Quadratic Stochastic Intensity and Prospective Mortality Tables," Working Papers 2007-30, Centre de Recherche en Economie et Statistique.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.