Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/86484 
Year of Publication: 
2006
Series/Report no.: 
Tinbergen Institute Discussion Paper No. 06-094/2
Publisher: 
Tinbergen Institute, Amsterdam and Rotterdam
Abstract: 
We extend the Hidden Markov Model for defaults of Crowder, Davis, and Giampieri (2005) to include covariates. The covariates enhance the prediction of transition probabilities from high to low default regimes. To estimate the model, we extend the EM estimating equations to account for the time varying nature of the conditional likelihoods due to sample attrition and extension. Using empirical U.S. default data, we find that GDP growth, the term structure of interest rates and stock market returns impact the state transition probabilities. The impact, however, is not uniform across industries. We only find a weak correspondence between industry credit cycle dynamics and general business cycles.
Subjects: 
defaults
Markov switching
default regimes
JEL: 
G33
G21
C22
Document Type: 
Working Paper

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