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- Publisher
- Oxford University Press
- Copyright
- © The Author 2005. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: journals.permissions@oupjournals.org.
- ISSN
- 1479-8409
- eISSN
- 1479-8417
- DOI
- 10.1093/jjfinec/nbi013
- Publisher site
- See Article on Publisher Site
Abstract
In this article we explain how to use rating histories provided by the internal scoring systems of banks and rating agencies in order to predict the future risk of a set of borrowers. The method is developed following the steps suggested by the Basle Committee. To introduce both migration correlation and non-Markovian serial dependence, we consider rating histories with stochastic transition matrices. We develop the methodology to estimate both the number and dynamics of the factors influencing the transitions and we explain how to use the model for prediction. As an illustration, the ordered probit model with unobservable dynamic factor is estimated from French data on corporate risk.
Journal
Journal of Financial Econometrics – Oxford University Press
Published: Jan 1, 2005