On Sovereign Credit Migration: A Study of Alternative Estimators and Rating Dynamics

Elena Kalotychou () and Ana-Maria Fuertes
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Elena Kalotychou: Cass Business School City University London

No 509, Computing in Economics and Finance 2006 from Society for Computational Economics

Abstract: This paper investigates the finite-sample behaviour of sovereign credit migration estimators and analyzes the properties of the rating process. Through bootstrap simulations, we compare a discrete multinomial estimator and two continuous hazard rate methods which differ in that one neglects time-heterogeneity in the rating process whereas the other accounts for it. The study is based on Moody's ratings 1981-2004 for 72 industrialized and emerging economies. Hazard rate estimators yield more accurate default probabilities. The time homogeneity assumption leads to underestimating the default probability and greater migration risk is inferred upon relaxing it. There is evidence of duration dependence and downgrade momentum effects in the rating process. These findings have important implications for economic and regulatory capital allocation and for the pricing of credit sensitive instruments.

Keywords: Sovereign credit risk; Rating transitions, Markov chain, Time heterogeneity, Rating momentum, Duration dependence. (search for similar items in EconPapers)
JEL-codes: C13 C41 G21 (search for similar items in EconPapers)
Date: 2006-07-04
New Economics Papers: this item is included in nep-fin and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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http://repec.org/sce2006/up.25487.1141742207.pdf (application/pdf)

Related works:
Journal Article: On sovereign credit migration: A study of alternative estimators and rating dynamics (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:sce:scecfa:509

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