A Non-Gaussian Panel Time Series Model for Estimating and Decomposing Default Risk

Siem Jan Koopman, Andre Lucas and Robert Daniels ()
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Robert Daniels: De Nederlandsche Bank, Amsterdam

No 05-060/4, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: This discussion paper led to an article in the Journal of Business and Economic Statistics (2008). Vol. 26, issue 4, pages 510-525.

We model 1981–2002 annual US default frequencies for a panel of firms in different rating and age classes. The data is decomposed into a systematic and firm-specific risk component, where the systematic component reflects the general economic conditions and default climate. We have to cope with (i) the shared exposure of each age cohort and rating class to the same systematic risk factor; (ii) strongly non-Gaussian features of the individual time series; (iii) possible dynamics of an unobserved common risk factor; (iv) changing default probabilities over the age of the rating, and (v) missing observations. We propose a non-Gaussian multivariate state space model that deals with all of this issues simultaneously. The model is estimated using importance sampling techniques that have been modified in a multivariate setting. This multivariate approach has significant advantages in terms of parameter stability and convergence of the importance sampler.

Keywords: credit risk; multivariate unobserved component models; importance sampling; non-Gaussian state space models (search for similar items in EconPapers)
JEL-codes: C15 C32 G21 (search for similar items in EconPapers)
Date: 2005-06-13
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Journal Article: A Non-Gaussian Panel Time Series Model for Estimating and Decomposing Default Risk (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20050060

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