Downward migration credit risk problem: a non-homogeneous backward semi-Markov reliability approach |
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Authors: | Guglielmo D’Amico Jacques Janssen Raimondo Manca |
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Institution: | 1.Università ‘G. d’Annunzio’ di Chieti,Chieti,Italy;2.Universitè Libre de Bruxelles,Brest,Belgium;3.Università ‘La Sapienza’,Roma,Italy |
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Abstract: | International organizations evaluate credit risk and rank firms according to risk by assigning them a ‘rating’. The time evolution of a rating can be studied by means of Markov models. Some papers have outlined the problem pertaining to the unsuitable fitting of Markov processes in a credit risk environment. This paper presents a model that overcomes the problems given by the Markov rating models. It includes non-homogeneity, the downward problem and the randomness of time in the transitions of states, thus making it possible to consider the duration inside a state in a complete way. In this paper, both, the transient and asymptotic analyses are presented. The asymptotic analysis is performed by using a mono-unireducible topological structure. Moreover, a real data application is conducted using the historical database of Standard & Poor’s as the source. |
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