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Development of a Transition Matrix Model of Credit Rating of Companies based on Forecasted Macro Factors: the Case of Greece

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  • John Leventides
  • Konstantinos Lefkaditis
  • Anna Donatou
  • Evangelos Melas
  • Costas Poulios

Abstract

In this paper, we develop a model for the rating transition matrices for corporates. These matrices quantify the credit quality of the business sector and, hence, they are related to the financial stability and growth of the economy. The main objective is to estimate how a corporate portfolio behaves under various macroeconomic conditions and (to show the link between the quality of a corporate portfolio with macro variables) and to build a new transition matrix based on specific forecasted macroeconomic variables according to IFRS 9 requirements for the calculation of ECL. The model has been developed based on historical transition rates of credit risk assessments provided by ICAP SA and historical values of various macro factors provided by Hellenic Statistical Authority. Â JEL classification numbers: G2, M1.

Suggested Citation

  • John Leventides & Konstantinos Lefkaditis & Anna Donatou & Evangelos Melas & Costas Poulios, 2023. "Development of a Transition Matrix Model of Credit Rating of Companies based on Forecasted Macro Factors: the Case of Greece," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 13(5), pages 1-3.
    • Handle: RePEc:spt:apfiba:v:13:y:2023:i:5:f:13_5_3
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    References listed on IDEAS

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    1. Nickell, Pamela & Perraudin, William & Varotto, Simone, 2000. "Stability of rating transitions," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 203-227, January.
    2. Robert A. Jarrow & David Lando & Stuart M. Turnbull, 2008. "A Markov Model for the Term Structure of Credit Risk Spreads," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 18, pages 411-453, World Scientific Publishing Co. Pte. Ltd..
    3. Sanjiv R. Das & Darrell Duffie & Nikunj Kapadia & Leandro Saita, 2007. "Common Failings: How Corporate Defaults Are Correlated," Journal of Finance, American Finance Association, vol. 62(1), pages 93-117, February.
    4. Mr. Matthew T Jones, 2005. "Estimating Markov Transition Matrices Using Proportions Data: An Application to Credit Risk," IMF Working Papers 2005/219, International Monetary Fund.
    5. Gordy, Michael B., 2000. "A comparative anatomy of credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 119-149, January.
    6. 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

    Rating transition matrices; Credit quality; Business sector; Macroeconomic factors.;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • M1 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration

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