Traces of business cycles in credit-rating migrations

Dmitri Boreiko (), Serguei Kaniovski, Yuri (Yuriy) Kaniovski (Kaniovskyi) () and Georg Pflug

PLOS ONE, 2017, vol. 12, issue 4, 1-29

Abstract: Using migration data of a rating agency, this paper attempts to quantify the impact of macroeconomic conditions on credit-rating migrations. The migrations are modeled as a coupled Markov chain, where the macroeconomic factors are represented by unobserved tendency variables. In the simplest case, these binary random variables are static and credit-class-specific. A generalization treats tendency variables evolving as a time-homogeneous Markov chain. A more detailed analysis assumes a tendency variable for every combination of a credit class and an industry. The models are tested on a Standard and Poor’s (S&P’s) dataset. Parameters are estimated by the maximum likelihood method. According to the estimates, the investment-grade financial institutions evolve independently of the rest of the economy represented by the data. This might be an evidence of implicit too-big-to-fail bail-out guarantee policies of the regulatory authorities.

Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:plo:pone00:0175911

DOI: 10.1371/journal.pone.0175911

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