Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/85937
Authors: 
Lucas, André
Klaassen, Pieter
Year of Publication: 
2003
Series/Report no.: 
Tinbergen Institute Discussion Paper 03-075/2
Abstract: 
Dynamic models for credit rating transitions are important ingredients for dynamic credit risk analyses. We compare the properties of two such models that have recently been put forward. The models mainly differ in their treatment of systematic risk, which can be modeled either using discrete states (e.g., expansion versus recession) or continous states. It turns out that the implied asset correlations for discrete state switching models are implausibly low compared to correlation estimates in the literature. Given these limited correlations, we conclude that care has to be taken when discrete state regime switching models are employed for dynamic credit risk management. As a side result of our analysis, we obtain indirect evidence that default correlations may change over the business cycle.
Subjects: 
credit risk
regime switching
latent variable models
factor models
JEL: 
G21
C22
C53
Document Type: 
Working Paper

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