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Title:
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Confidence sets for continuous-time rating
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Author:
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Christensen, Jens; Hansen, Ernst; Lando, David |
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Abstract:
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This paper addresses the estimation of default probabilities and associated
confidence sets with special focus on rare events. Research on rating transition
data has documented a tendency for recently downgraded issuers to
be at an increased risk of experiencing further downgrades compared to issuers
that have held the same rating for a longer period of time. To capture
this non-Markov effect we introduce a continuous-time hidden Markov chain
model in which downgrades firms enter into a hidden, ’excited’ state. Using
data from Moody’s we estimate the parameters of the model, and conclude
that both default probabilities and confidence sets are strongly influenced by
the introduction of hidden excited states. |
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URI:
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http://hdl.handle.net/10398/8139
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Date:
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2010-07-02 |
This work is licensed under a Creative Commons License.
