Evidence of non-Markovian behavior in the process of bank rating migrations

Jose Gomez-Gonzalez and Nicholas Kiefer ()

No 3961, Borradores de Economia from Banco de la Republica

Abstract: This paper estimates transition matrices for the ratings on nancial insti-tutions, using an unusually informative data set. We show that the processof rating migration exhibits signi cant non-Markovian behavior, in the sensethat the transition intensities are a¤ected by macroeconomic and bank spe-ci c variables. We illustrate how the use of a continuous time frameworkmay improve the estimation of the transition probabilities. However, thetime homogeneity assumption, frequently done in economic applications,does not hold, even for short time intervals. Thus, the information providedby migrations alone is not enough to forecast the future behavior of ratings.The stage of the business cycle should be taken into account, and individualcharacteristics of banks must be considered as well.

Keywords: Financial institutions; macroeconomic variables; capitalization; supervision; transition intensities. (search for similar items in EconPapers)
JEL-codes: C4 E44 G21 G23 G38 (search for similar items in EconPapers)
Pages: 23
Date: 2007-07-17
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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http://www.banrep.gov.co/docum/ftp/borra448.pdf

Related works:
Journal Article: Evidence of Non-Markovian Behavior in the Process of Bank Rating Migrations (2009)
Working Paper: Evidence of non-Markovian behavior in the process of bank rating migrations (2007)
Working Paper: Evidence of non-Markovian behavior in the process of bank rating migrations (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:col:000094:003961

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