A dependent hidden Markov model of credit quality

DOI10.1155/2012/719237MaRDI QIDQ448329zbMATH OpenOpenAlexWikidataFDO

Authors Małgorzata Wiktoria Korolkiewicz

Publication date 6 September 2012

Published in International Journal of Stochastic Analysis (Search for Journal in Brave)

Full work available at URL https://doi.org/10.1155/2012/719237

Mathematics Subject Classification ID

Discrete-time Markov processes on general state spaces (60J05) Credit risk (91G40)

Review text

Summary: We propose a dependent hidden Markov model of credit quality. We suppose that the ``true credit quality is not observed directly but only through noisy observations given by posted credit ratings. The model is formulated in discrete time with a Markov chain observed in martingale noise, where ``noise terms of the state and observation processes are possibly dependent. The model provides estimates for the state of the Markov chain governing the evolution of the credit rating process and the parameters of the model, where the latter are estimated using the EM algorithm. The dependent dynamics allow for the so-called ``rating momentum discussed in the credit literature and also provide a convenient test of independence between the state and observation dynamics.

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Cites work

• A coupled Markov chain approach to credit risk modeling
• A hidden Markov model of credit quality
• Hierarchical Monte Carlo methods for fractal random fields

Cited in

(9)

• Markov chain model with catastrophe to determine mean time to default of credit risky assets
• Extracting information from spot interest rates and credit ratings using double higher-order hidden Markov models
• A hidden Markov model of credit quality
• Robust and consistent estimation of generators in credit risk
• Capturing model risk and rating momentum in the estimation of probabilities of default and credit rating migrations
• Smoothed Parameter Estimation for a Hidden Markov Model of Credit Quality
• Analysis of default data using hidden Markov models
• Identification of hidden Markov chains governing dependent credit-rating migrations
• Modeling default data via an interactive hidden Markov model

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