Estimating the probability of a non-Markovian rating transition from partially unobserved histories

Rafael Weißbach and Friederike Schmal

Journal of Risk Management in Financial Institutions, 2019, vol. 12, issue 3, 256-267

Abstract: There is substantial evidence that bank rating data display non-Markovian structures. We introduce a non-Markovian parameter in a simple model for rating transition histories. Accounting for the frequent statistical obstacle of partially missing transitions, we make use of the expectation maximisation (EM) algorithm to estimate all model parameters and find a marked non-Markovian effect for our data.

Keywords: rating transitions; PD; missing data; non-Markovian process; EM algorithm (search for similar items in EconPapers)
JEL-codes: E5 G2 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:aza:rmfi00:y:2019:v:12:i:3:p:256-267

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