Rating philosophy and dynamic properties of internal rating systems: A general framework and an application to backtesting

Anna Cornaglia and Marco Morone

MPRA Paper from University Library of Munich, Germany

Abstract: The paper draws a general framework for asset and default dynamics, separating the influence of the economic cycle into a component which is embedded in the rating system and an unobservable risk factor that determines the movements of defaults around the ex ante estimated PDs. The two components – the sensitivity of ratings to credit cycle and conditional asset correlation - can be quantified through a Maximum Likelihood approach, giving a measure of the cyclicality of the rating system, and allowing for a number of applications: among those the modified binomial test proposed here.

Keywords: rating philosophy; rating dynamics; cyclicality; asset correlation; migration matrices; ML estimation; backtesting; binomial test (search for similar items in EconPapers)
JEL-codes: C13 C15 G32 (search for similar items in EconPapers)
Date: 2009-01-23
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Citations: View citations in EconPapers (5)

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