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A Duration Dependent Rating Migration Model: Real Data Application and Cost of Capital Estimation

Author

Listed:
  • Biase di Giuseppe

    (G. d'Annunzio University of Chieti-Pescara, Faculty of Pharmacy, Italy)

  • Guglielmo D'Amico

    (G. d'Annunzio University of Chieti-Pescara, Faculty of Pharmacy, Italy)

  • Jacques Janssen

    (University of Western Brittany, France)

  • Raimondo Manca

    (Sapienza University of Rome, Italy)

Abstract

This paper presents a duration dependent model for analyzing the evolution of credit ratings. It considers the backward recurrence process to tackle the time of permanence problem in the rating classes. In this way it is possible to manage the duration effects, which represent one of the most important features in rating dynamics. Furthermore, the paper shows how it is possible to compute the cost of capital that an organization is required to pay for the capital used in financing its activities. A real data application using Standard & Poor’s historical database is provided.

Suggested Citation

  • Biase di Giuseppe & Guglielmo D'Amico & Jacques Janssen & Raimondo Manca, 2014. "A Duration Dependent Rating Migration Model: Real Data Application and Cost of Capital Estimation," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 64(3), pages 233-245, June.
    • Handle: RePEc:fau:fauart:v:64:y:2014:i:3:p:233-245
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    References listed on IDEAS

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    More about this item

    Keywords

    semi-Markov models; survival analysis; default probability;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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