Forecasting US bond default ratings allowing for previous and initial state dependence in an ordered probit model

Paul Mizen and Serafeim Tsoukas

Working Papers from Business School - Economics, University of Glasgow

Abstract: In this paper, we investigate the ability of a number of different ordered probit models to predict ratings based on firm-specific data on business and financial risks. We investigate models based on momentum, drift and ageing and compare them against alternatives that take into account the initial rating of the firm and its previous actual rating. Using data on US bond issuing firms rated by Fitch over the years 2000 to 2007 we compare the performance of these models in predicting the rating in-sample and out-of-sample using root mean squared errors, Diebold-Mariano tests of forecast performance and contingency tables. We conclude that initial and previous states have a substantial influence on rating prediction.

Keywords: Credit ratings; probit; state dependence (search for similar items in EconPapers)
JEL-codes: C25 C53 G24 G33 (search for similar items in EconPapers)
Date: 2011-08
New Economics Papers: this item is included in nep-bec, nep-for and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Forecasting US bond default ratings allowing for previous and initial state dependence in an ordered probit model (2012)
Working Paper: Forecasting US bond default ratings allowing for previous and initial state dependence in an ordered probit model (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:gla:glaewp:2011_19

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