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Observation Driven Mixed-Measurement Dynamic Factor Models with an Application to Credit Risk

Tinbergen Institute Discussion Paper 11-042/DSF 16

43 Pages Posted: 22 Feb 2011  

Drew D. Creal

University of Chicago - Booth School of Business - Econometrics and Statistics

Bernd Schwaab

European Central Bank (ECB) - Directorate General Research

Siem Jan Koopman

Vrije Universiteit Amsterdam; Tinbergen Institute

Andre Lucas

VU Amsterdam - School of Business and Economics; Tinbergen Institute

Multiple version iconThere are 2 versions of this paper

Date Written: February 11, 2011

Abstract

We propose a dynamic factor model for mixed-measurement and mixed-frequency panel data. In this framework time series observations may come from a range of families of parametric distributions, may be observed at different time frequencies, may have missing observations, and may exhibit common dynamics and cross-sectional dependence due to shared exposure to dynamic latent factors. The distinguishing feature of our model is that the likelihood function is known in closed form and need not be obtained by means of simulation, thus enabling straightforward parameter estimation by standard maximum likelihood. We use the new mixed-measurement framework for the signal extraction and forecasting of macro, credit, and loss given default risk conditions for U.S. Moody's-rated firms from January 1982 until March 2010.

Keywords: panel data, loss given default, default risk, dynamic beta density, dynamic ordered probit, dynamic factor model

JEL Classification: C32, G32

Suggested Citation

Creal, Drew D. and Schwaab, Bernd and Koopman, Siem Jan and Lucas, Andre, Observation Driven Mixed-Measurement Dynamic Factor Models with an Application to Credit Risk (February 11, 2011). Tinbergen Institute Discussion Paper 11-042/DSF 16. Available at SSRN: https://ssrn.com/abstract=1765764 or http://dx.doi.org/10.2139/ssrn.1765764

Drew D. Creal (Contact Author)

University of Chicago - Booth School of Business - Econometrics and Statistics ( email )

Chicago, IL 60637
United States

Bernd Schwaab

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Siem Jan Koopman

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
1081 HV Amsterdam
Netherlands
+31205986019 (Phone)

HOME PAGE: http://sjkoopman.net

Tinbergen Institute ( email )

Gustav Mahlerplein 117
1082 MS Amsterdam
Netherlands

HOME PAGE: http://personal.vu.nl/s.j.koopman

Andre Lucas

VU Amsterdam - School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands
+31 20 598 6039 (Phone)
+31 20 598 6020 (Fax)

HOME PAGE: http://personal.vu.nl/a.lucas

Tinbergen Institute

Roetersstraat 31
Amsterdam, 1018 WB
Netherlands

HOME PAGE: http://www.tinbergen.nl

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