Confidence sets for continuous-time rating transition probabilities

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• 作者：Christensen ; Jens H.E. ; Hansen ; Ernst ; Lando ; David
• 关键词：C41 ; G21 ; G28 ; Rating transitions ; Rating drift ; Continuous-time Markov chains ; Confidence sets ; Default probabilities
• 刊名：Journal of Banking and Finance
• 出版年：2004
• 出版时间：November, 2004
• 年：2004
• 卷：28
• 期：11
• 页码：2575-2602
• 全文大小：367 K

文摘

This paper addresses the estimation of default probabilities and associated confidence sets with special focus on rare events. Research on rating transition data has documented a tendency for recently downgraded issuers to be at an increased risk of experiencing further downgrades compared to issuers that have held the same rating for a longer period of time. To capture this non-Markov effect we introduce a continuous-time hidden Markov chain model in which downgrades firms enter into a hidden, aaaexcitedaaa state. Using data from Moodyaaas we estimate the parameters of the model, and conclude that both default probabilities and confidence sets are strongly influenced by the introduction of hidden excited states.