Author： Weißbach Rafael
Publisher： Springer Publishing Company
ISSN： 0377-7332
Source： Empirical Economics, Vol.36, Iss.3, 2009-06, pp. : 575-596
Disclaimer: Any content in publications that violate the sovereignty, the constitution or regulations of the PRC is not accepted or approved by CNPIEC.
Abstract
When modelling rating transitions as continuous-time Markov processes, in practice, time-homogeneity is a common assumption, yet restrictive, in order to reduce the complexity of the model. This paper investigates whether rating transition probabilities change after the origination of debt. Accordingly, we develop a likelihood-ratio test for the hypothesis of time-homogeneity. The alternative is a step function of transition intensities. The test rejects time-homogeneity for rating transitions observed over 7 years in a real corporate portfolio. Especially 1-year transition probabilities increase over the first year after origination. This time effect suggests that banks should manage their credit portfolios with respect to the age of debt.
Related content
By Reinhart Carmen M. Rogoff Kenneth S.
The American Economic Review, Vol. 100, Iss. 2, 2010-05 ,pp. :
Access to resources
Recommend
