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DURATION MODELS FOR CREDIT RATING MIGRATION: EVIDENCE FROM THE FINANCIAL CRISIS

Myriam Ben Ayed, Adel Karaa and Jean-Luc Prigent ()

Economic Inquiry, 2018, vol. 56, issue 3, 1870-1886

Abstract: We introduce a specific duration model to analyze the prediction of the credit rating migration. We consider hazard rate processes based on multi‐state autoregressive conditional duration models. To take account of the economic context, we model the conditional mean of the duration between two ratings by means of a latent process. To this purpose, a dynamic‐ordered probit model is developed to describe the directions taken by the ratings in the presence of multiple states. As an illustration, we study the migration of credit rating during periods before and after the financial crisis. (JEL C14, C41, G24)

Date: 2018
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