Stochastic Migration Models with Application to Corporate Risk
Les Cahiers du CREF of HEC Montréal Working Paper No. 04-11
71 Pages Posted: 18 Jul 2005
Date Written: May 2004
We consider a set of Markovian processes with Stochastic transition matrices. This specification extends the standard stochastic intensity model introduced by Cox in the two state case. Such a model is appropriate for the joint analysis of rating histories of several corporates, including the link between upgrades or downgrades, that is the so-called migration correlation. Different specifications of the micro- and macro-components of the model are introduced and discussed. As an illustration the ordered Probit model with unobservable dynamic factor is estimated from French data on corporate risk.
Keywords: Migration, rating, migration correlation, credit risk, stochastic intensity, autoregressive gamma process, Jacobi process, ordered qualitative model, Kalman filter, panel data
JEL Classification: C23, C35, G11
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