Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/86188
Authors: 
Koopman, Siem Jan
Lucas, André
Monteiro, André
Year of Publication: 
2005
Series/Report no.: 
Tinbergen Institute Discussion Paper 05-071/4
Abstract: 
A new empirical reduced-form model for credit rating transitions is introduced. It is a parametric intensity-based duration model with multiple states and driven by exogenous covariates and latent dynamic factors. The model has a generalized semi-Markov structure designed to accommodate many of the stylized facts of credit rating migrations. Parameter estimation is based on Monte Carlo maximum likelihood methods for which the details are discussed in this paper. A simulation experiment is carried out to show the effectiveness of the estimation procedure. An empirical application is presented for transitions in a 7 grade rating system. The model includes a common dynamic component that can be interpreted as the credit cycle. Asymmetric effects of this cycle across rating grades and additional semi-Markov dynamics are found to be statistically significant. Finally, we investigate whether the common factor model suffices to capture systematic risk in rating transition data by introducing multiple factors in the model.
Subjects: 
unobserved components
credit cycles
duration model
generator matrix
Monte Carlo likelihood
JEL: 
C15
C33
C41
C43
G11
G21
Document Type: 
Working Paper

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