A Duration Dependent Rating Migration Model: Real Data Application and Cost of Capital Estimation

Biase di Giuseppe (), Guglielmo D'Amico, Jacques Janssen and Raimondo Manca
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Biase di Giuseppe: G. d'Annunzio University of Chieti-Pescara, Faculty of Pharmacy, Italy
Guglielmo D'Amico: G. d'Annunzio University of Chieti-Pescara, Faculty of Pharmacy, Italy
Jacques Janssen: University of Western Brittany, France
Raimondo Manca: Sapienza University of Rome, Italy

Czech Journal of Economics and Finance (Finance a uver), 2014, vol. 64, issue 3, 233-245

Abstract: This paper presents a duration dependent model for analyzing the evolution of credit ratings. It considers the backward recurrence process to tackle the time of permanence problem in the rating classes. In this way it is possible to manage the duration effects, which represent one of the most important features in rating dynamics. Furthermore, the paper shows how it is possible to compute the cost of capital that an organization is required to pay for the capital used in financing its activities. A real data application using Standard & Poor’s historical database is provided.

Keywords: semi-Markov models; survival analysis; default probability (search for similar items in EconPapers)
JEL-codes: C63 G32 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:fau:fauart:v:64:y:2014:i:3:p:233-245

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