Advanced Search
MyIDEAS: Login

An Alternative Methodology for Estimating Credit Quality Transition Matrices

Contents:

Author Info

  • Jose Eduardo Gómez

    ()

  • Paola Morales Acevedo

    ()

  • Fernando Pineda

    ()

  • Nancy Zamudio

    ()

Abstract

Financial institutions use credit ratings to express their risk perception abouttheir clients. Credit ratings feed their internal credit scoring models, allowingthem to evaluate the current state of the quality of their balances and to calcu-late the reserves required to provision their loan portfolios. The information theyprovide constitutes therefore a useful tool for evaluating credit demands and forasigning the corresponding interest rates to approved credits.Moreover, within a credit risk administration system, it is crucial to be able toforecast the behavior of the clients�ratings in the future and their possible changesof state. From this perspective, transition matrices constitute a fundamental toolfor �nancial institutions, because they measure migration probabilities amongstates. Transition probabilities are at the core of modern credit risk models andare a standard point for risk dynamics, therefore they must be estimated with rig-urous precision using the most proper techniques available.In many important economic applications (e.g. J.P. Morgan�s Credit Metrics),transition matrices are estimated under the Markovian assumption in a discrete-time setting using a cohort method. In a discrete and �nite space setting, theprobability of migrating from state i to state j is estimated by dividing the num-ber of observed migrations from i to j in a given time period by the total numberof �rms in state i at the beginning of the period. One implication of this cohortmethod is that if no �rm migrates directly from state i to j during the observa-tion period, the estimate of the corresponding probability is zero. This is a notdesirable feature, specially when dealing with the estimation of rare event proba-bilities which, in case of occurring, may have a deep impact.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.banrep.gov.co/docum/ftp/borra478.pdf
Download Restriction: no

Bibliographic Info

Paper provided by BANCO DE LA REPÚBLICA in its series BORRADORES DE ECONOMIA with number 004395.

as in new window
Length: 19
Date of creation: 23 Dec 2007
Date of revision:
Handle: RePEc:col:000094:004395

Contact details of provider:

Related research

Keywords: Firms; macroeconomic variables; ...rm-speci...c covariates; hazardfunction; transition intensities.;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

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.:
as in new window
  1. José E. Gómez-González & Nicholas M. Kiefer., 2009. "Evidence of Non-Markovian Behavior in the Process of Bank Rating Migrations," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 46(133), pages 33-50.
  2. 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.
  3. Kiefer, Nicholas M, 1988. "Economic Duration Data and Hazard Functions," Journal of Economic Literature, American Economic Association, vol. 26(2), pages 646-79, June.
  4. Audretsch, David B & Mahmood, Talat, 1995. "New Firm Survival: New Results Using a Hazard Function," The Review of Economics and Statistics, MIT Press, vol. 77(1), pages 97-103, February.
  5. Mahlmann, Thomas, 2006. "Estimation of rating class transition probabilities with incomplete data," Journal of Banking & Finance, Elsevier, vol. 30(11), pages 3235-3256, November.
  6. Anil Bangia & Francis X. Diebold & Til Schuermann, 2000. "Ratings Migration and the Business Cycle, With Application to Credit Portfolio Stress Testing," Center for Financial Institutions Working Papers 00-26, Wharton School Center for Financial Institutions, University of Pennsylvania.
  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.
  8. 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.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Angela González Arbeláez, . "Determinantes del riesgo de crédito comercial en Colombia," Temas de Estabilidad Financiera 045, Banco de la Republica de Colombia.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:col:000094:004395. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Norma Judith Paternina).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.