Forecasting US bond default ratings allowing for previous and initial state dependence in an ordered probit model

Paul Mizen and Serafeim Tsoukas

No 2011-69, SIRE Discussion Papers from Scottish Institute for Research in Economics (SIRE)

Abstract: In this paper we investigate the ability of a number of different ordered probit models to predict ratings based on firm-specific data on business and financial risks. We investigate models based on momentum, drift and ageing and compare them against alternatives that take into account the initial rating of the firm and its previous actual rating. Using data on US bond issuing firms rated by Fitch over the years 2000 to 2007 we compare the performance of these models in predicting the rating in-sample and out-of-sample using root mean squared errors, Diebold-Mariano tests of forecast performance and contingency tables. We conclude that initial and previous states have a substantial influence on rating prediction.

Keywords: Credit ratings; probit; state dependence (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Forecasting US bond default ratings allowing for previous and initial state dependence in an ordered probit model (2012)
Working Paper: Forecasting US bond default ratings allowing for previous and initial state dependence in an ordered probit model (2011)
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