Authors: Lawrenz, Claudia
Tschiersch, Patrick
Weißbach, Rafael
Title: Testing Homogeneity of Time-Continuous Rating Transitions
Language (ISO): en
Abstract: Banks could achieve substantial improvements of their portfolio credit risk assessment by estimating rating transition matrices within a time-continuous Markov model, thereby using continuous-time rating transitions provided by internal rating systems instead of discrete-time rating information. A non-parametric test for the hypothesis of time-homogeneity is developed. The alternative hypothesis is multiple structural change of transition intensities, i.e. time-varying transition probabilities. The partial-likelihood ratio for the multivariate counting process of rating transitions is shown to be asymptotically c2 -distributed. A Monte Carlo simulation finds both size and power to be adequate for our example. We analyze transitions in credit-ratings in a rating system with 8 rating states and 2743 transitions for 3699 obligors observed over seven years. The test rejects the homogeneity hypothesis at all conventional levels of significance.
Subject Headings: Markov model
partial likelihood
Portfolio credit risk
Rating transitions
time-homogeneity
URI: http://hdl.handle.net/2003/21638
http://dx.doi.org/10.17877/DE290R-14496
Issue Date: 2005-10-11T14:37:40Z
Appears in Collections:Sonderforschungsbereich (SFB) 475

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