Credit risk rating migration and unobserved borrower heterogeneity
AbstractSome 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 InfoArticle provided by Emerald Group Publishing in its journal Agricultural Finance Review.
Volume (Year): 68 (2008)
Issue (Month): 2 (September)
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Web page: http://www.emeraldinsight.com
Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
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