Resource title

Confidence sets for continuous-time rating

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Resource description

This paper addresses the estimation of default probabilities and associatedconfidence sets with special focus on rare events. Research on rating transitiondata has documented a tendency for recently downgraded issuers tobe at an increased risk of experiencing further downgrades compared to issuersthat have held the same rating for a longer period of time. To capturethis non-Markov effect we introduce a continuous-time hidden Markov chainmodel in which downgrades firms enter into a hidden, ’excited’ state. Usingdata from Moody’s we estimate the parameters of the model, and concludethat both default probabilities and confidence sets are strongly influenced bythe introduction of hidden excited states.

Resource author

Jens Christensen, Ernst Hansen, David Lando

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Resource publish date

Resource language

eng

Resource content type

application/pdf

Resource resource URL

http://hdl.handle.net/10398/8139

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