IDEAS home Printed from https://ideas.repec.org/a/cup/jfinqa/v42y2007i03p595-620_00.html
   My bibliography  Save this article

The Dynamics of Credit Spreads and Ratings Migrations

Author

Listed:
  • Farnsworth, Heber
  • Li, Tao

Abstract

There is a large and growing literature on how to model the dynamics of the default-free term structure to fit the observed historical data. Much less is known about how best to model the dynamics of defaultable yield curves. This paper develops a class of defaultable term structure models that is tractable enough to be empirically implemented and flexible enough to capture some important behaviors of the credit spreads in the data. We compare two non-nested models within this class using a Bayesian estimation technique, which helps to solve the problem of latent state variables. The Bayesian approach also enables us to test the two non-nested models on the basis of the Bayes factor. The results strongly suggest that models with constant transition probabilities will not be able to fit the observed dynamics of inter-rating spreads.

Suggested Citation

  • Farnsworth, Heber & Li, Tao, 2007. "The Dynamics of Credit Spreads and Ratings Migrations," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 42(03), pages 595-620, September.
  • Handle: RePEc:cup:jfinqa:v:42:y:2007:i:03:p:595-620_00
    as

    Download full text from publisher

    File URL: http://journals.cambridge.org/abstract_S0022109000004117
    File Function: link to article abstract page
    Download Restriction: no

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Chateau, Jean-Pierre D., 2011. "Contribution à la réglementation de Bâle-3 : de la consistance interne du continuum du crédit commercial en marquant à la « valeur de modèle » le risque de crédit des engagements de crédit," L'Actualité Economique, Société Canadienne de Science Economique, vol. 87(4), pages 445-479, décembre.
    2. Dionne, Georges & Gauthier, Geneviève & Hammami, Khemais & Maurice, Mathieu & Simonato, Jean-Guy, 2011. "A reduced form model of default spreads with Markov-switching macroeconomic factors," Journal of Banking & Finance, Elsevier, vol. 35(8), pages 1984-2000, August.
    3. Enrico Laghi & Michele Di Marcantonio & Eugenio D'Amico, 2014. "Estimating credit default swap spreads using accounting data, market quotes and credit ratings: the European Banks Case," FINANCIAL REPORTING, FrancoAngeli Editore, vol. 2014(2-3-4), pages 59-81.
    4. Stefanescu, Catalina & Tunaru, Radu & Turnbull, Stuart, 2009. "The credit rating process and estimation of transition probabilities: A Bayesian approach," Journal of Empirical Finance, Elsevier, vol. 16(2), pages 216-234, March.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cup:jfinqa:v:42:y:2007:i:03:p:595-620_00. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Keith Waters). General contact details of provider: http://journals.cambridge.org/jid_JFQ .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.