Time series properties of a rating system based on financial ratios
AbstractThis paper provides an overview on classical and new methods for testing time series properties of migration matrices. It is well known that due to cyclical behaviour of the economy transition matrices for many credit portfolios cannot be considered to be constant through time. Further, transition matrices are dependent on the used rating methodology. We investigate the changes in migrations of an extensiverating system based on financial ratios. Our findings are time-inhomogeneity, second-order Mrkov behaviour, a tendency for "rating equalization" and vast effects of migration behaviour on risk figures like expected shortfall and VaR. We further illustrate how changes in migration matrices can be related to macroeconomic factors. --
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Bibliographic InfoPaper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 2: Banking and Financial Studies with number 2005,14.
Date of creation: 2005
Date of revision:
Reduced Form Models; Rating Transitions; Markov Property; Internal Rating Systems; Time Homogeneity; Matrix Norms;
Find related papers by JEL classification:
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
- G20 - Financial Economics - - Financial Institutions and Services - - - General
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-08-05 (All new papers)
- NEP-FIN-2006-08-05 (Finance)
- NEP-FMK-2006-08-05 (Financial Markets)
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