The Ordered Qualitative Model For Credit Rating Transitions

Joann Jasiak, D. Feng and Christian Gourieroux
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D. Feng: CIBC, Toronto, Canada

Working Papers from York University, Department of Economics

Abstract: Information on the expected changes in credit quality of obligors is contained in credit migration matrices which trace out the movements of firms across ratings categories in a given period of time and in a given group of bond issuers. The rating matrices provided by Moody’s, Standard &Poor’s and Fitch became crucial inputs to many applications, including the assessment of risk on corporate credit portfolios (CreditVar) and credit derivatives pricing. We propose a factor probit model for modeling and prediction of credit rating matrices that are assumed to be stochastic and driven by a latent factor. The filtered latent factor path reveals the effect of the economic cycle on corporate credit ratings, and provides evidence in support of the PIT (point-in-time) rating philosophy. The factor probit model also yields the estimates of cross-sectional correlations in rating transitions that are documented empirically but not fully accounted for in the literature and in the regulatory rules established by the Basle Committee.

Keywords: Credit Rating; Migration; Migration Correlation; Credit Risk; Probit Model; Latent Factor; Business Cycle. (search for similar items in EconPapers)
JEL-codes: C23 C35 G11 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2006-02
New Economics Papers: this item is included in nep-dcm
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http://dept.econ.yorku.ca/research/workingPapers/working_papers/2006/JEF06.pdf First version, 200r65

Related works:
Journal Article: The ordered qualitative model for credit rating transitions (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:yca:wpaper:2006_2

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