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Evidence of Non-Markovian Behavior in the Process of Bank Rating Migrations

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Author Info
José E. Gómez-González
Nicholas M. Kiefer.

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Abstract

This paper estimates transition matrices for the ratings on financial institutions, using an unusually informative data set. We show that the process of rating migration exhibits significant non-Markovian behavior, in the sense that the transition intensities are affected by macroeconomic and bank-specific variables. We illustrate how the use of a continuous time framework may improve the estimation of the transition probabilities.

However, the time homogeneity assumption, frequently done in economic applications, does not hold, even for short time intervals. Thus, the information provided by migrations alone is not enough to forecast the future behavior of ratings. The stage of the business cycle should be taken into account, and individual characteristics of banks must be considered as well.

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Publisher Info
Article provided by Instituto de Economía. Pontificia Universidad Católica de Chile. in its journal Cuadernos de Economía.

Volume (Year): 46 (2009)
Issue (Month): 133 ()
Pages: 33-50
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Handle: RePEc:ioe:cuadec:v:46:y:2009:i:133:p:33-50

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Related research
Keywords: Financial Institutions; Macroeconomic Variables; Capitalization; Supervision; Transition Intensities.;

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Find related papers by JEL classification:
C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
G23 - Financial Economics - - Financial Institutions and Services - - - Pension Funds; Other Private Financial Institutions
G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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.:

  1. Mahlmann, Thomas, 2006. "Estimation of rating class transition probabilities with incomplete data," Journal of Banking & Finance, Elsevier, vol. 30(11), pages 3235-3256, November. [Downloadable!] (restricted)
  2. Kiefer, Nicholas M, 1988. "Economic Duration Data and Hazard Functions," Journal of Economic Literature, American Economic Association, vol. 26(2), pages 646-79, June. [Downloadable!] (restricted)
  3. 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. [Downloadable!] (restricted)
  4. Kiefer, Nicholas M. & Larson, C. Erik, 2007. "A simulation estimator for testing the time homogeneity of credit rating transitions," Journal of Empirical Finance, Elsevier, vol. 14(5), pages 818-835, December. [Downloadable!] (restricted)
  5. Giovanni Ferri & Li-Gang Liu, 2003. "How Do Global Credit-Rating Agencies Rate Firms from Developing Countries?," Asian Economic Papers, MIT Press, vol. 2(3), pages 30-56. [Downloadable!] (restricted)
  6. Liliana Rojas-Suarez, 2001. "Rating Banks in Emerging Markets: What Credit Rating Agencies Should Learn from Financial Indicators," Peterson Institute Working Paper Series WP01-6, Peterson Institute for International Economics. [Downloadable!]
  7. Gomez-Gonzalez, Jose E. & Kiefer, Nicholas M., 2006. "Bank Failure: Evidence from the Colombia Financial Crisis," Working Papers 06-12, Cornell University, Center for Analytic Economics. [Downloadable!]
  8. N. Jonker, 2002. "Credit Ratings of the Banking Sector," WO Research Memoranda (discontinued) 714, Netherlands Central Bank, Research Department. [Downloadable!]
  9. 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. [Downloadable!] (restricted)
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Cited by:
(explanations, 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.)

  1. Jose E. Gómez & Paola Morales & Fernando Pineda & nzamudgo@banrep.gov.co, . "An Alternative Methodology for Estimating Credit Quality Transition Matrices," Borradores de Economia 478, Banco de la Republica de Colombia. [Downloadable!]
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