Advanced Search
MyIDEAS: Login

Discrete versus continuous state switching models for portfolio credit risk

Contents:

Author Info

  • Lucas, Andre
  • Klaassen, Pieter

Abstract

Dynamic models for credit rating transitions are important ingredients for dynamic credit risk analyses. We compare the properties of two such models that have recently been put forward. The models mainly differ in their treatment of systematic risk, which can be modeled either using discrete states (e.g., expansion versus recession) or continous states. It turns out that the implied asset correlations for discrete state switching models are implausibly low compared to correlation estimates in the literature. Given these limited correlations, we conclude that care has to be taken when discrete state regime switching models are employed for dynamic credit risk management. As a side result of our analysis, we obtain indirect evidence that default correlations may change over the business cycle.

(This abstract was borrowed from another version of this item.)

Download Info

If 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.
File URL: http://www.sciencedirect.com/science/article/B6VCY-4FP1J8V-1/2/4db987536677bbaf1ab573dda7b8a3f0
Download Restriction: Full text for ScienceDirect subscribers only

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 Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 30 (2006)
Issue (Month): 1 (January)
Pages: 23-35

as in new window
Handle: RePEc:eee:jbfina:v:30:y:2006:i:1:p:23-35

Contact details of provider:
Web page: http://www.elsevier.com/locate/jbf

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
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.:
as in new window
  1. 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.
  2. 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.).
  3. Lucas, Andre & Klaassen, Pieter & Spreij, Peter & Straetmans, Stefan, 2001. "An analytic approach to credit risk of large corporate bond and loan portfolios," Journal of Banking & Finance, Elsevier, vol. 25(9), pages 1635-1664, September.
  4. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  5. Gordy, Michael B., 2000. "A comparative anatomy of credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 119-149, January.
  6. Linda Allen & Anthony Saunders, 2003. "A survey of cyclical effects in credit risk measurement model," BIS Working Papers 126, Bank for International Settlements.
  7. Pamela Nickell & William Perraudin & Simone Varotto, 2001. "Stability of ratings transitions," Bank of England working papers 133, Bank of England.
  8. Siem Jan Koopman & André Lucas & Pieter Klaassen, 2002. "Pro-Cyclicality, Empirical Credit Cycles, and Capital Buffer Formation," Tinbergen Institute Discussion Papers 02-107/2, Tinbergen Institute.
  9. 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.
  10. Jarrow, Robert A & Turnbull, Stuart M, 1995. " Pricing Derivatives on Financial Securities Subject to Credit Risk," Journal of Finance, American Finance Association, vol. 50(1), pages 53-85, March.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Konrad Banachewicz & André Lucas & Aad van der Vaart, 2008. "Modelling Portfolio Defaults Using Hidden Markov Models with Covariates," Econometrics Journal, Royal Economic Society, vol. 11(1), pages 155-171, 03.
  2. Siem Jan Koopman & Roman Kraeussl & Andre Lucas & Andre Monteiro, 2006. "Credit Cycles and Macro Fundamentals," Tinbergen Institute Discussion Papers 06-023/2, Tinbergen Institute.
  3. Konrad Banachewicz & Andr� Lucas, 2007. "Quantile Forecasting for Credit Risk Management using possibly Mis-specified Hidden Markov Models," Tinbergen Institute Discussion Papers 07-046/2, Tinbergen Institute.
  4. Konrad Banachewicz & Aad van der Vaart & Andr� Lucas, 2006. "Modeling Portfolio Defaults using Hidden Markov Models with Covariates," Tinbergen Institute Discussion Papers 06-094/2, Tinbergen Institute.
  5. Petr JAKUBÍK, 2007. "Macroeconomic Environment and Credit Risk (in English)," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 57(1-2), pages 60-78, March.
  6. Marcucci, Juri & Quagliariello, Mario, 2009. "Asymmetric effects of the business cycle on bank credit risk," Journal of Banking & Finance, Elsevier, vol. 33(9), pages 1624-1635, September.
  7. Petr Jakubík, 2007. "Credit Risk and the Finnish Economy," Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 1(3), pages 254-285, November.
  8. Guler Aras & Lale Aslan, 2011. "Capital structure and credit risk management: evidence from Turkey," International Journal of Accounting and Finance, Inderscience Enterprises Ltd, vol. 3(1), pages 1-20.
  9. Konrad Banachewicz & André Lucas, 2008. "Quantile forecasting for credit risk management using possibly misspecified hidden Markov models," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 27(7), pages 566-586.
  10. Siem Jan Koopman & Roman Kraeussl & Andre Lucas & Andre Monteiro, 2006. "Credit Cycles and Macro Fundamentals," Tinbergen Institute Discussion Papers 06-023/2, Tinbergen Institute.
  11. Kim, Mi Ae & Jang, Bong-Gyu & Lee, Ho-Seok, 2008. "A first-passage-time model under regime-switching market environment," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2617-2627, December.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:30:y:2006:i:1:p:23-35. See general information about how to correct material in RePEc.

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.