|Title:||Testing Homogeneity of Time-Continuous Rating Transitions|
|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|
Portfolio credit risk
|Appears in Collections:||Sonderforschungsbereich (SFB) 475|
This item is protected by original copyright
Items in Eldorado are protected by copyright, with all rights reserved, unless otherwise indicated.