Siem Jan Koopman () (Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam) André Lucas () (Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam) Robert Daniels () (De Nederlandsche Bank, Amsterdam)
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We model 1981–2002 annual US default frequencies for a panel of firms in different rating and age classes. The data is decomposed into a systematic and firm-specific risk component, where the systematic component reflects the general economic conditions and default climate. We have to cope with (i) the shared exposure of each age cohort and rating class to the same systematic risk factor; (ii) strongly non-Gaussian features of the individual time series; (iii) possible dynamics of an unobserved common risk factor; (iv) changing default probabilities over the age of the rating, and (v) missing observations. We propose a non-Gaussian multivariate state space model that deals with all of this issues simultaneously. The model is estimated using importance sampling techniques that have been modified in a multivariate setting. This multivariate approach has significant advantages in terms of parameter stability and convergence of the importance sampler.
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Find related papers by JEL classification: C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Statistical Simulation Methods C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
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