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Credit risk rating migration and unobserved borrower heterogeneity

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  • Jeffrey R. Stokes
  • Jonathan B. Dressler
  • Lakshmi Balasubramanyan

Abstract

Some past studies of credit risk ratings migration have found trend reversals and evidence that the data-generating process is nonstationary. Using a sample of Farm Credit System mortgages, we find no compelling statistical evidence of either phenomenon. We do find evidence that our sample of loans may be characterized by two types of borrowers – namely, movers and stayers. This type of borrower heterogeneity is unobserved because movers who do not migrate are indistinguishable from stayers who never migrate. We report on the development of a flexible nonparametric model for estimating transition probabilities. The model can also be used to estimate nonstationary transition probabilities and an example is provided.

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Bibliographic Info

Article provided by Emerald Group Publishing in its journal Agricultural Finance Review.

Volume (Year): 68 (2008)
Issue (Month): 2 (September)
Pages: 237-253

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Handle: RePEc:eme:afrpps:v:68:y:2008:i:2:p:237-253

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Related research

Keywords: Credit risk; Markov chain; Maximum entropy; Migration; Risk ratings;

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