An Alternative Methodology for Estimating Credit Quality Transition Matrices

Banco de la República Borradores de Economía No. 448

18 Pages Posted: 28 Jun 2008

See all articles by Jose E Gomez-Gonzalez

Jose E Gomez-Gonzalez

Banco de la Republica

Paola Acevedo

affiliation not provided to SSRN

Fernando Pineda Garcia

Banco de la Republica

Nancy E. Zamudio Gomez

Central Bank of Colombia

Date Written: December 27, 2007

Abstract

This study presents an alternative way of estimating credit transition matrices using a hazard function model. The model is useful both for testing the validity of the Markovian assumption, frequently made in credit rating applications, and also for estimating transition matrices conditioning on firm-specific and macroeconomic covariates that influence the migration process. The model presented in the paper is likely to be useful in other applications, though we would hesitate to extrapolate numerical values of coefficients outside of our application. Transition matrices estimated this way may be an important tool for a credit risk administration system, in the sense that with them a practitioner can easily forecast the behavior of the clients' ratings in the future and their possible changes of state.

Keywords: firms, macroeconomic variables, firm-specific covariates, hazard function, transition intensities

JEL Classification: C4, E44, G21, G23, G38

Suggested Citation

Gomez-Gonzalez, Jose Eduardo and Acevedo, Paola and Garcia, Fernando Pineda and Gomez, Nancy E. Zamudio, An Alternative Methodology for Estimating Credit Quality Transition Matrices (December 27, 2007). Banco de la República Borradores de Economía No. 448, Available at SSRN: https://ssrn.com/abstract=1152349 or http://dx.doi.org/10.2139/ssrn.1152349

Jose Eduardo Gomez-Gonzalez (Contact Author)

Banco de la Republica ( email )

Carrera 7 #14-78
Bogota
Colombia

Paola Acevedo

affiliation not provided to SSRN

Fernando Pineda Garcia

Banco de la Republica

Carrera 7 #14-78
Bogota
Colombia

Nancy E. Zamudio Gomez

Central Bank of Colombia ( email )

Carrera 7 #14-78
Bogota
Colombia

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