A Simulation Estimator for Testing the Time Homogeneity of Credit Rating Transitions PDF Download
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Author: Nicholas M. Kiefer
Publisher:
ISBN:
Category :
Languages : en
Pages : 30
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Book Description
The measurement of credit quality is at the heart of the models designed to assess the reserves and capital needed to support the risks of both individual credits and portfolios of credit instruments. A popular specificatio for credit-rating transitions is the simple, time-homogeneous Markov model. While the Markov specification cannot really describe processes in the long run, it may be useful for adequately describing short-run changes in portfolio risk. In this specification, the entire stochastic process can be characterized in terms of estimated transition probabilities. However, the simple homogeneous Markovian transition framework is restrictive. We propose a test of the null hypotheses of time-homogeneity that can be performed on the sorts of data often reported. We apply the tests to 4 data sets, on commerical paper, sovereign debt, municipal bonds and Samp;P Corporates. The results indicate that commercial paper looks Markovian on a 30-day time scale for up to 6 months; sovereign debt also looks Markovian (perhaps due to a small sample size); municipals are well-modeled by the Markov specification for up to 5 years, but could probably benefit from frequent updating of the estimated transition matrix or from more sophisticated modeling, and Samp;P Corporate ratings are approximately Markov over 3 transitions but not 4.
Author: Nicholas M. Kiefer
Publisher:
ISBN:
Category :
Languages : en
Pages : 30
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Book Description
The measurement of credit quality is at the heart of the models designed to assess the reserves and capital needed to support the risks of both individual credits and portfolios of credit instruments. A popular specificatio for credit-rating transitions is the simple, time-homogeneous Markov model. While the Markov specification cannot really describe processes in the long run, it may be useful for adequately describing short-run changes in portfolio risk. In this specification, the entire stochastic process can be characterized in terms of estimated transition probabilities. However, the simple homogeneous Markovian transition framework is restrictive. We propose a test of the null hypotheses of time-homogeneity that can be performed on the sorts of data often reported. We apply the tests to 4 data sets, on commerical paper, sovereign debt, municipal bonds and Samp;P Corporates. The results indicate that commercial paper looks Markovian on a 30-day time scale for up to 6 months; sovereign debt also looks Markovian (perhaps due to a small sample size); municipals are well-modeled by the Markov specification for up to 5 years, but could probably benefit from frequent updating of the estimated transition matrix or from more sophisticated modeling, and Samp;P Corporate ratings are approximately Markov over 3 transitions but not 4.
Author: Maygol Bandehali
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
This thesis is an empirical investigation of various estimation methods for the analysis of the dynamics of credit rating matrices. More specifically, the thesis presents three maximum likelihood estimation methods of the latent factor ordered-Probit model, which is also known as the stochastic credit migration model, a homogeneous nonlinear dynamic panel model with a common unobserved factor, to determine the dynamics of credit ratings transition probabilities. The first two methods rely on analytical approximation of the true log-likelihood function of the latent factor ordered-Probit model based on the granularity theory. The third method is maximum composite likelihood estimation of the latent factor ordered-Probit model which is the new. Chapter 1 provides the literature review on the dynamics, estimation and modelling the credit rating transition matrix. The notation and general assumptions of a latent factor ordered-Probit model are introduced, and the statistical inference of the latent factor ordered-Probit model is discussed. Chapter 2 reviews two maximum likelihood estimation methods of the latent factor ordered-Probit model which rely on analytical approximations of the log-likelihood function based on the granularity theory. The effect of the underlying state of the economy on corporate credit ratings is inferred from the common factor path. The estimated model allows us to examine the effects of shocks to the economy, i.e. the stress testing at the overall portfolio level, which is also a required element of the execution of Basel II. The stress scenarios are selected to evaluate the stressed migration probabilities and relate them with the state of the economy. The empirical results are obtained from the series of transition probabilities matrices provided by the internal rating system of a French bank over the period 2007 to 2015. Chapter 3 introduces the maximum composite likelihood estimation method for the latent factor ordered-Probit model. The computational complexity of the full information maximum likelihood in application to the stochastic migration model is the main motivation to introduce a new method, which is computationally easier and provides consistent estimators. The new method is illustrated in a simulation study that confirms good performance of the maximum composite likelihood estimation.
Author: Stefan Trueck
Publisher: Academic Press
ISBN: 0080920306
Category : Business & Economics
Languages : en
Pages : 279
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Book Description
In the last decade rating-based models have become very popular in credit risk management. These systems use the rating of a company as the decisive variable to evaluate the default risk of a bond or loan. The popularity is due to the straightforwardness of the approach, and to the upcoming new capital accord (Basel II), which allows banks to base their capital requirements on internal as well as external rating systems. Because of this, sophisticated credit risk models are being developed or demanded by banks to assess the risk of their credit portfolio better by recognizing the different underlying sources of risk. As a consequence, not only default probabilities for certain rating categories but also the probabilities of moving from one rating state to another are important issues in such models for risk management and pricing. It is widely accepted that rating migrations and default probabilities show significant variations through time due to macroeconomics conditions or the business cycle. These changes in migration behavior may have a substantial impact on the value-at-risk (VAR) of a credit portfolio or the prices of credit derivatives such as collateralized debt obligations (D+CDOs). In Rating Based Modeling of Credit Risk the authors develop a much more sophisticated analysis of migration behavior. Their contribution of more sophisticated techniques to measure and forecast changes in migration behavior as well as determining adequate estimators for transition matrices is a major contribution to rating based credit modeling. Internal ratings-based systems are widely used in banks to calculate their value-at-risk (VAR) in order to determine their capital requirements for loan and bond portfolios under Basel II One aspect of these ratings systems is credit migrations, addressed in a systematic and comprehensive way for the first time in this book The book is based on in-depth work by Trueck and Rachev
Author: Bernd Engelmann
Publisher: Springer Science & Business Media
ISBN: 3642161146
Category : Business & Economics
Languages : en
Pages : 432
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Book Description
The estimation and the validation of the Basel II risk parameters PD (default probability), LGD (loss given fault), and EAD (exposure at default) is an important problem in banking practice. These parameters are used on the one hand as inputs to credit portfolio models and in loan pricing frameworks, on the other to compute regulatory capital according to the new Basel rules. This book covers the state-of-the-art in designing and validating rating systems and default probability estimations. Furthermore, it presents techniques to estimate LGD and EAD and includes a chapter on stress testing of the Basel II risk parameters. The second edition is extended by three chapters explaining how the Basel II risk parameters can be used for building a framework for risk-adjusted pricing and risk management of loans.
Author: André Monteiro
Publisher:
ISBN:
Category :
Languages : en
Pages : 40
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Author: Svetlozar T. Rachev
Publisher: Springer Science & Business Media
ISBN: 0817681809
Category : Mathematics
Languages : en
Pages : 438
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Book Description
The subject of numerical methods in finance has recently emerged as a new discipline at the intersection of probability theory, finance, and numerical analysis. The methods employed bridge the gap between financial theory and computational practice, and provide solutions for complex problems that are difficult to solve by traditional analytical methods. Although numerical methods in finance have been studied intensively in recent years, many theoretical and practical financial aspects have yet to be explored. This volume presents current research and survey articles focusing on various numerical methods in finance. The book is designed for the academic community and will also serve professional investors.
Author: HALINA FRYDMAN
Publisher:
ISBN:
Category :
Languages : en
Pages : 25
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Publisher: Rozenberg Publishers
ISBN: 9051709293
Category :
Languages : en
Pages : 221
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Author: Mr.Marco Gross
Publisher: International Monetary Fund
ISBN: 1513549081
Category : Business & Economics
Languages : en
Pages : 47
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The objective of this paper is to present an integrated tool suite for IFRS 9- and CECL-compatible estimation in top-down solvency stress tests. The tool suite serves as an illustration for institutions wishing to include accounting-based approaches for credit risk modeling in top-down stress tests.
Author:
Publisher:
ISBN:
Category :
Languages : en
Pages : 30
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