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Credit Risk Measurement Based on the Markov Chain

Author

Listed:
  • Hao Liu
  • Shijin Chen

Abstract

Credit migration matrices are often used in many credit risk and pricing application, and typically assumed to be generated by a simple Markov process. This paper is going to analyze the basic elements of credit risk research, and Maximum Likelihood estimation will be adopted to estimate the Mover-Stayer model¡¯s parameters in this paper. Furthermore, the recursive method will be used to compute the Maximum Likelihood estimator, and the numerical results can illustrate the strength of the Mover-Stayer model on credit risk analysis. We also use the hypotheses to prove that the Markov chain suit for the data against the hypotheses that the Mover-Stayer model more suitable for the data. Finally, we will make some comparisons according to the output of the program, and obtain some conclusions. The Mover-Stayer Model is more suitable against according the numbered result.

Suggested Citation

  • Hao Liu & Shijin Chen, 2015. "Credit Risk Measurement Based on the Markov Chain," Business and Management Research, Business and Management Research, Sciedu Press, vol. 4(3), pages 32-42, September.
    • Handle: RePEc:jfr:bmr111:v:4:y:2015:i:3:p:32-42
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    References listed on IDEAS

    as
    1. Tak-Kuen Siu & Wai-Ki Ching & S. Eric Fung & Michael Ng, 2005. "On a multivariate Markov chain model for credit risk measurement," Quantitative Finance, Taylor & Francis Journals, vol. 5(6), pages 543-556.
    2. Dean Fantazzini & Silvia Figini, 2009. "Random Survival Forests Models for SME Credit Risk Measurement," Methodology and Computing in Applied Probability, Springer, vol. 11(1), pages 29-45, March.
    3. Linda Allen & Anthony Saunders, 2004. "Incorporating Systemic Influences Into Risk Measurements: A Survey of the Literature," Journal of Financial Services Research, Springer;Western Finance Association, vol. 26(2), pages 161-191, October.
    4. Lutz G. Arnold & John G. Riley, 2009. "On the Possibility of Credit Rationing in the Stiglitz-Weiss Model," American Economic Review, American Economic Association, vol. 99(5), pages 2012-2021, December.
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    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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