A Non-Gaussian Panel Time Series Model for Estimating and Decomposing Default Risk
We model 19812002 annual default frequencies for a panel of US firms in different rating and age classes from the Standard and Poor's database. The data is decomposed into a systematic and firm-specific risk component, where the systematic component reflects the general economic conditions and default climate. We have to cope with (i) the shared exposure of each age cohort and rating class to the same systematic risk factor; (ii) strongly non-Gaussian features of the individual time series; (iii) possible dynamics of an unobserved common risk factor; (iv) changing default probabilities over the age of the rating, and (v) missing observations. We propose a non-Gaussian ultivariate state space model that deals with all of these issues simultaneously. The model is estimated using importance sampling techniques that have been modified to a multivariate setting. We show in a simulation study that such a multivariate approach improves the performance of the importance sampler.
|Date of creation:||Nov 2005|
|Date of revision:|
|Contact details of provider:|| Postal: Postbus 98, 1000 AB Amsterdam|
Web page: http://www.dnb.nl/en/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Michael B. Gordy, 1998.
"A comparative anatomy of credit risk models,"
Finance and Economics Discussion Series
1998-47, Board of Governors of the Federal Reserve System (U.S.).
- Bangia, Anil & Diebold, Francis X. & Kronimus, Andre & Schagen, Christian & Schuermann, Til, 2002.
"Ratings migration and the business cycle, with application to credit portfolio stress testing,"
Journal of Banking & Finance,
Elsevier, vol. 26(2-3), pages 445-474, March.
- 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.
- Cowan, Adrian M. & Cowan, Charles D., 2004. "Default correlation: An empirical investigation of a subprime lender," Journal of Banking & Finance, Elsevier, vol. 28(4), pages 753-771, April.
- Altman, Edward I, 1989. " Measuring Corporate Bond Mortality and Performance," Journal of Finance, American Finance Association, vol. 44(4), pages 909-22, September.
- Dietsch, Michel & Petey, Joel, 2004. "Should SME exposures be treated as retail or corporate exposures? A comparative analysis of default probabilities and asset correlations in French and German SMEs," Journal of Banking & Finance, Elsevier, vol. 28(4), pages 773-788, April.
- Pamela Nickell & William Perraudin & Simone Varotto, 2001.
"Stability of ratings transitions,"
Bank of England working papers
133, Bank of England.
- Michel Dietsch, 2004. "Should SME exposures be treated as retail or corporate exposures: a comparative analysis of probabilities of default and assets correlations in French and German SMEs," ULB Institutional Repository 2013/14164, ULB -- Universite Libre de Bruxelles.
- Kloek, Tuen & van Dijk, Herman K, 1978. "Bayesian Estimates of Equation System Parameters: An Application of Integration by Monte Carlo," Econometrica, Econometric Society, vol. 46(1), pages 1-19, January.
- Koopman, Siem Jan & Lucas, Andre & Klaassen, Pieter, 2005. "Empirical credit cycles and capital buffer formation," Journal of Banking & Finance, Elsevier, vol. 29(12), pages 3159-3179, December.
- Marianne Baxter & Robert G. King, 1999.
"Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series,"
The Review of Economics and Statistics,
MIT Press, vol. 81(4), pages 575-593, November.
- Tom Doan, . "BKFILTER: RATS procedure to implement band pass filter using Baxter-King method," Statistical Software Components RTS00026, Boston College Department of Economics.
- Marianne Baxter & Robert G. King, 1995. "Measuring Business Cycles Approximate Band-Pass Filters for Economic Time Series," NBER Working Papers 5022, National Bureau of Economic Research, Inc.
- Linda Allen & Anthony Saunders, 2003. "A survey of cyclical effects in credit risk measurement model," BIS Working Papers 126, Bank for International Settlements.
- Asquith, Paul & Mullins, David W, Jr & Wolff, Eric D, 1989. " Original Issue High Yield Bonds: Aging Analyses of Defaults, Exchanges, and Calls," Journal of Finance, American Finance Association, vol. 44(4), pages 923-52, September.
- Durbin, James & Koopman, Siem Jan, 2001.
"Time Series Analysis by State Space Methods,"
Oxford University Press, number 9780198523543, December.
- Tom Doan, . "SEASONALDLM: RATS procedure to create the matrices for the seasonal component of a DLM," Statistical Software Components RTS00251, Boston College Department of Economics.
- Neil Shephard & Michael K Pitt, 1995.
"Likelihood analysis of non-Gaussian parameter driven models,"
15 & 108., Economics Group, Nuffield College, University of Oxford.
- Shephard, N. & Pitt, M.K., 1995. "Likelihood Analysis of Non-Gaussian Parameter-Driven Models," Economics Papers 108, Economics Group, Nuffield College, University of Oxford.
- Geweke, John, 1989. "Bayesian Inference in Econometric Models Using Monte Carlo Integration," Econometrica, Econometric Society, vol. 57(6), pages 1317-39, November.
- J. Durbin, 2002. "A simple and efficient simulation smoother for state space time series analysis," Biometrika, Biometrika Trust, vol. 89(3), pages 603-616, August.
- Danielsson, J & Richard, J-F, 1993. "Accelerated Gaussian Importance Sampler with Application to Dynamic Latent Variable Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(S), pages S153-73, Suppl. De.
- Neil Shephard, 2005.
Economics Series Working Papers
2005-W17, University of Oxford, Department of Economics.
- Siem Jan Koopman & André Lucas, 2003.
"Business and Default Cycles for Credit Risk,"
Tinbergen Institute Discussion Papers
03-062/2, Tinbergen Institute, revised 09 Jan 2003.
- Altman, Edward I. & Suggitt, Heather J., 2000. "Default rates in the syndicated bank loan market: A mortality analysis," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 229-253, January.
When requesting a correction, please mention this item's handle: RePEc:dnb:dnbwpp:055. 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: (Rob Vet)
If references are entirely missing, you can add them using this form.