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An alternative methodology for estimating credit quality transition matrices

Author

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  • Gómez-González, José E.
  • Acevedo, Paola Morales
  • García, Fernando Pineda
  • Gómez, Nancy Zamudio

Abstract

This study presents an alternative method of estimating credit quality transition matrices using a hazard function model. The model is useful both for testing the validity of the Markovian assumption, frequently made in credit rating applications, and also for estimating transition matrices conditioning on firm-specific and macroeconomic covariates that influence the migration process. The model presented in the paper is likely to be useful in other applications, although extrapolating numerical values of the coefficients outside of the present context is not recommended. Transition matrices estimated this way may be an important tool for a credit risk administration system, in the sense that a practitioner can use them to forecast the future behaviour of clients' ratings, and their possible change of state.

Suggested Citation

  • Gómez-González, José E. & Acevedo, Paola Morales & García, Fernando Pineda & Gómez, Nancy Zamudio, 2009. "An alternative methodology for estimating credit quality transition matrices," Journal of Risk Management in Financial Institutions, Henry Stewart Publications, vol. 2(4), pages 353-364, September.
    • Handle: RePEc:aza:rmfi00:y:2009:v:2:i:4:p:353-364
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    More about this item

    Keywords

    firms; macroeconomic variables; firm-specific covariates; hazard function; transition intensities; C4; E44; G21; G23; G38;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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