Evidence of non-Markovian behavior in the process of bank rating migrations

Jose Gomez-Gonzalez and Nicholas Kiefer ()

Borradores de Economia from Banco de la Republica de Colombia

Abstract: This paper estimates transition matrices for the ratings on financial insti-tutions, using an unusually informative data set. We show that the process of rating migration exhibits significant non-Markovian behavior, in the sense that the transition intensities are affected by macroeconomic and bank spe- cific variables. We illustrate how the use of a continuous time framework may improve the estimation of the transition probabilities. However, the time homogeneity assumption, frequently done in economic applications, does not hold, even for short time intervals. Thus, the information provided by migrations alone is not enough to forecast the future behavior of ratings. The stage of the business cycle should be taken into account, and individual characteristics of banks must be considered as well.

Keywords: Financial institutions; macroeconomic variables; capitaliza- tion; supervision; transition intensities. (search for similar items in EconPapers)
JEL-codes: C4 E44 G21 G23 G38 (search for similar items in EconPapers)
Date: 2007-07
New Economics Papers: this item is included in nep-ban
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Citations: View citations in EconPapers (1)

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https://doi.org/10.32468/be.448 (application/pdf)

Related works:
Journal Article: Evidence of Non-Markovian Behavior in the Process of Bank Rating Migrations (2009)
Working Paper: Evidence of non-Markovian behavior in the process of bank rating migrations (2007)
Working Paper: Evidence of non-Markovian behavior in the process of bank rating migrations (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:bdr:borrec:448

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