Do changes in distance-to-default anticipate changes in the credit rating?
AbstractDistance-to-default (DtD) from the Merton model has been used in the credit risk literature, most successfully as an input into reduced form models for forecasting default. In this paper, we suggest that the change in the DtD is informative for predicting change in the credit rating. This is directly useful for situations where forecasts of credit rating changes are required. More generally, it contributes to our knowledge about reduced form models of credit risk.
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Bibliographic InfoPaper provided by Indira Gandhi Institute of Development Research, Mumbai, India in its series Indira Gandhi Institute of Development Research, Mumbai Working Papers with number 2012-010.
Length: 31 pages
Date of creation: Mar 2012
Date of revision:
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Distance to Default; rating downgrades; rating change; forecasts; event study analysis; probit models; simulation; bootstrap; crisis analysis;
Find related papers by JEL classification:
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
- 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-2012-05-15 (All new papers)
- NEP-BAN-2012-05-15 (Banking)
- NEP-CBA-2012-05-15 (Central Banking)
- NEP-FOR-2012-05-15 (Forecasting)
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