Modelling Rating Transitions
The time-continuous discrete-state Markov process is a model for rating transitions. One parameter, namely the intensity to migrate to an adjacent rating state, implies an ordinal rating to have an intuitive metric. State-specific intensities generalize the state-stationarity. Observing Markov processes from a multiplicative intensity model, the maximum likelihood parameter estimators for both models can be written as a martingale transform of the processes that count transitions between the rating states. A Taylor expansion reveals consistency and asymptotic normality of the parameter estimates, resulting in a chi-square-distributed likelihood ratio of state-stationarity and the state-specific model. This extents to time-stationarity. Simulations contrast the asymptotic results with finite samples. An application to a sufficiently large set of credit rating histories shows that the one-parameter model can be a good starting point.
|Date of creation:||2011|
|Date of revision:|
|Contact details of provider:|| Web page: http://www.socialpolitik.org/|
More information through EDIRC
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.:
- 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.
- 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.
- Christensen, Jens H.E. & Hansen, Ernst & Lando, David, 2004. "Confidence sets for continuous-time rating transition probabilities," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2575-2602, November.
- Koopman, Siem Jan & Lucas, AndrÃ©, 2008.
"A Non-Gaussian Panel Time Series Model for Estimating and Decomposing Default Risk,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 26, pages 510-525.
- Siem Jan Koopman & André Lucas & Robert Daniels, 2005. "A Non-Gaussian Panel Time Series Model for Estimating and Decomposing Default Risk," Tinbergen Institute Discussion Papers 05-060/4, Tinbergen Institute.
- Siem Jan Koopman & André Lucas & Robert J. Daniels, 2005. "A Non-Gaussian Panel Time Series Model for Estimating and Decomposing Default Risk," DNB Working Papers 055, Netherlands Central Bank, Research Department.
- Kiefer, Nicholas M. & Larson, C. Erik, 2007.
"A simulation estimator for testing the time homogeneity of credit rating transitions,"
Journal of Empirical Finance,
Elsevier, vol. 14(5), pages 818-835, December.
- 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.
- Merton, Robert C, 1974.
"On the Pricing of Corporate Debt: The Risk Structure of Interest Rates,"
Journal of Finance,
American Finance Association, vol. 29(2), pages 449-70, May.
- Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- 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.
- Frydman, Halina & Schuermann, Til, 2008. "Credit rating dynamics and Markov mixture models," Journal of Banking & Finance, Elsevier, vol. 32(6), pages 1062-1075, June.
- Kiefer, Nicholas M., 2010. "Default Estimation and Expert Information," Journal of Business & Economic Statistics, American Statistical Association, vol. 28(2), pages 320-328.
- Weißbach, Rafael & Walter, Ronja, 2010. "A likelihood ratio test for stationarity of rating transitions," Journal of Econometrics, Elsevier, vol. 155(2), pages 188-194, April.
- Rafael Weißbach & Patrick Tschiersch & Claudia Lawrenz, 2009. "Testing time-homogeneity of rating transitions after origination of debt," Empirical Economics, Springer, vol. 36(3), pages 575-596, June.
When requesting a correction, please mention this item's handle: RePEc:zbw:vfsc11:48698. 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: (ZBW - German National Library of Economics)
If references are entirely missing, you can add them using this form.