A Non-Gaussian Panel Time Series Model for Estimating and Decomposing Default Risk
AbstractWe model 1981-2002 annual default frequencies for a panel of US firms in different rating and age classes from the Standard and Poor's database. 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 ultivariate state space model that deals with all of these issues simultaneously. The model is estimated using importance sampling techniques that have been modified to a multivariate setting. We show in a simulation study that such a multivariate approach improves the performance of the importance sampler.
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Bibliographic InfoPaper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 055.
Date of creation: Nov 2005
Date of revision:
credit risk; multivariate unobserved component models; importance sampling; non-Gaussian state space models.;
Other versions of this item:
- Koopman, Siem Jan & Lucas, AndrÃ©, 2008. "A Non-Gaussian Panel Time Series Model for Estimating and Decomposing Default Risk," Journal of Business & Economic Statistics, American Statistical Association, vol. 26, pages 510-525.
- Siem Jan Koopman & André Lucas & Robert Daniels, 2005. "A Non-Gaussian Panel Time Series Model for Estimating and Decomposing Default Risk," Tinbergen Institute Discussion Papers 05-060/4, Tinbergen Institute.
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-12-01 (All new papers)
- NEP-ECM-2005-12-01 (Econometrics)
- NEP-ETS-2005-12-01 (Econometric Time Series)
- NEP-FIN-2005-12-01 (Finance)
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