Smoothed Parameter Estimation for a Hidden Markov Model of Credit Quality

Małgorzata W. Korolkiewicz () and Robert J. Elliott ()
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Małgorzata W. Korolkiewicz: University of South Australia
Robert J. Elliott: University of Calgary

Chapter 5 in Hidden Markov Models in Finance, 2007, pp 69-90 from Springer

Abstract: Summary We consider a hidden Markov model of credit quality. We assume that the credit rating evolution can be described by a Markov chain but that we do not observe this Markov chain directly. Rather, it is hidden in “noisy” observations represented by the posted credit ratings. The model is formulated in discrete time with a Markov chain observed in martingale noise. We derive smoothed estimates for the state of the Markov chain governing the evolution of the credit rating process and the parameters of the model.

Keywords: Hidden Markov model; smoothing; credit quality (search for similar items in EconPapers)
Date: 2007
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Persistent link: https://EconPapers.repec.org/RePEc:spr:isochp:978-0-387-71163-8_5

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DOI: 10.1007/0-387-71163-5_5

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