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Econometric Estimation of Credit Rating Transition Matrices

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  • Chizhova, Anna

Abstract

The article presents an econometric approach to estimation of credit transition matrices by using a number of explanatory variables such as geographic region, industry, business cycle, state, and borrower’s credit history. The hurdle or-dered probit model is in the core of the proposed method. The hurdle specification of a model allows performing an estimation procedure in two steps with default probabilities characterizing an objectively observed default event estimated in the first step followed by estimation of transition probabilities describing transitions of borrowers’ credit ratings subjectively assigned by credit managers. A data source is a unified database containing detailed information about the borrowers in the credit portfolio of a large German banking alliance.

Suggested Citation

  • Chizhova, Anna, 2007. "Econometric Estimation of Credit Rating Transition Matrices," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 7(3), pages 11-26.
    • Handle: RePEc:ris:apltrx:0143
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    References listed on IDEAS

    as
    1. Kern, Markus & Rudolph, Bernd, 2001. "Comparative analysis of alternative credit risk models: An application on German middle market loan portfolios," CFS Working Paper Series 2001/03, Center for Financial Studies (CFS).
    2. Crouhy, Michel & Galai, Dan & Mark, Robert, 2000. "A comparative analysis of current credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 59-117, January.
    3. Lando, David & Skodeberg, Torben M., 2002. "Analyzing rating transitions and rating drift with continuous observations," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 423-444, March.
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    More about this item

    Keywords

    credit rating; transition matrices;

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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