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Bank-Sourced Transition Matrices: Are Banks' Internal Credit Risk Estimates Markovian?

Author

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  • Barbora Máková

    (Institute of Economic Studies, Faculty of Social Science, Charles University, Prague, Czech Republic
    Credit Benchmark, London, UK)

Abstract

This study provides new insights into banks' credit risk models by exploring features of their credit risk estimates and assessing practicalities of transition matrix estimation and related assumptions. Using a unique dataset of internal credit risk estimates from twelve global A-IRB banks, covering monthly observations on 20,000 North American and EU large corporates over the 2015-2018 time period, the study empirically tests the widely used assumptions of the Markovian property and time homogeneity at a larger scale than previously documented in the literature. The results show that internal credit risk estimates do not satisfy these assumptions as they show evidence of both path-dependency and time heterogeneity. In addition, contradicting previous findings on credit rating agency data, banks tend to revert their rating actions.

Suggested Citation

  • Barbora Máková, 2019. "Bank-Sourced Transition Matrices: Are Banks' Internal Credit Risk Estimates Markovian?," Working Papers IES 2019/3, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Mar 2019.
    • Handle: RePEc:fau:wpaper:wp2019_03
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    File URL: http://ies.fsv.cuni.cz/sci/publication/show/id/6019/lang/cs
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    More about this item

    Keywords

    Risk management; credit risk; transition matrices;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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