A score-test on measurement errors in rating transition times

Rafael Rafael Weißbach and Sebastian Voß

VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy from Verein für Socialpolitik / German Economic Association

Abstract: We model credit rating histories as continuous-time discrete-state Markov processes. Infrequent monitoring of the debtors' solvency will result in erroneous observations of the rating transition times, and consequently in biased parameter estimates. We develop a score test against such measurement errors in the transition data that is independent of the error distribution. We derive the asymptotic chi-square distribution for the test statistic under the null by stochastic limit theory. The test is applied to an international corporate portfolio, while accounting for economic and debtor-specific covariates. The test indicates that measurement errors in the transition times are a real problem in practice.

JEL-codes: C41 C52 G33 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-ecm
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc14:100532

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