Testing Homogeneity of Time-Continuous Rating Transitions
Loading...
Date
2005-10-11T14:37:40Z
Journal Title
Journal ISSN
Volume Title
Publisher
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.
Description
Table of contents
Keywords
Markov model, partial likelihood, Portfolio credit risk, Rating transitions, time-homogeneity