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Evidence of non-Markovian behavior in the process of bank rating migrations

  • José E. Gómez-Gonzalez

    ()

  • Nicholas M. Kiefer

    ()

This paper estimates transition matrices for the ratings on �nancial insti-tutions, using an unusually informative data set. We show that the processof rating migration exhibits signi�cant non-Markovian behavior, in the sensethat the transition intensities are a¤ected by macroeconomic and bank spe-ci�c variables. We illustrate how the use of a continuous time frameworkmay improve the estimation of the transition probabilities. However, thetime homogeneity assumption, frequently done in economic applications,does not hold, even for short time intervals. Thus, the information providedby migrations alone is not enough to forecast the future behavior of ratings.The stage of the business cycle should be taken into account, and individualcharacteristics of banks must be considered as well.

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Paper provided by BANCO DE LA REPÚBLICA in its series BORRADORES DE ECONOMIA with number 003961.

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Length: 23
Date of creation: 17 Jul 2007
Date of revision:
Handle: RePEc:col:000094:003961
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  1. Liliana Rojas-Suarez, 2001. "Rating Banks in Emerging Markets: What Credit Rating Agencies Should Learn from Financial Indicators," Working Paper Series WP01-6, Peterson Institute for International Economics.
  2. Kiefer, Nicholas M. & Larson, C. Erik, 2006. "A Simulation Estimator for Testing the Time Homogeneity of Credit Rating Transition," Working Papers 06-10, Cornell University, Center for Analytic Economics.
  3. Giovanni Ferri & Li-Gang Liu, 2003. "How Do Global Credit-Rating Agencies Rate Firms from Developing Countries?," Asian Economic Papers, MIT Press, vol. 2(3), pages 30-56.
  4. Anil Bangia & Francis X. Diebold & Til Schuermann, 2000. "Ratings Migration and the Business Cycle, With Application to Credit Portfolio Stress Testing," Center for Financial Institutions Working Papers 00-26, Wharton School Center for Financial Institutions, University of Pennsylvania.
  5. 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.
  6. Gomez-Gonzalez, Jose E. & Kiefer, Nicholas M., 2006. "Bank Failure: Evidence from the Colombia Financial Crisis," Working Papers 06-12, Cornell University, Center for Analytic Economics.
  7. Kiefer, Nicholas M, 1988. "Economic Duration Data and Hazard Functions," Journal of Economic Literature, American Economic Association, vol. 26(2), pages 646-79, June.
  8. N. Jonker, 2002. "Credit Ratings of the Banking Sector," WO Research Memoranda (discontinued) 714, Netherlands Central Bank, Research Department.
  9. Mahlmann, Thomas, 2006. "Estimation of rating class transition probabilities with incomplete data," Journal of Banking & Finance, Elsevier, vol. 30(11), pages 3235-3256, November.
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