Estimating Markov Transition Matrices Using Proportions Data: An Application to Credit Risk

 
Author/Editor: Jones, Matthew T. ; International Monetary Fund. Monetary and Financial Systems Dept.
 
Publication Date: November 01, 2005
 
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Summary: This paper outlines a way to estimate transition matrices for use in credit risk modeling with a decades-old methodology that uses aggregate proportions data. This methodology is ideal for credit-risk applications where there is a paucity of data on changes in credit quality, especially at an aggregate level. Using a generalized least squares variant of the methodology, this paper provides estimates of transition matrices for the United States using both nonperforming loan data and interest coverage data. The methodology can be employed to condition the matrices on economic fundamentals and provide separate transition matrices for expansions and contractions, for example. The transition matrices can also be used as an input into other credit-risk models that use transition matrices as a basic building block.
 
Series: Working Paper No. 05/219
Subject(s): Credit risk | United States | Loans | Data analysis

Author's Keyword(s): Markov transition matrix | credit risk | nonperforming loans | interest coverage
 
English
Publication Date: November 01, 2005
ISBN/ISSN: 1934-7073 Format: Paper
Stock No: WPIEA2005219 Pages: 27
Price:
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