Please use this identifier to cite or link to this item:
https://hdl.handle.net/20.500.14279/14693
Title: | Credit Rating Migration Risk and Business Cycles |
Authors: | Fei, Fei Fuertes, Ana Maria Kalotychou, Elena |
metadata.dc.contributor.other: | Καλοτύχου, Έλενα |
Major Field of Science: | Social Sciences |
Field Category: | Economics and Business |
Keywords: | Basel III;Credit risk;Default probability;Out-of-sample prediction;Rating migration;Value-at-risk;Procyclicality |
Issue Date: | 2012 |
Source: | Journal of Business Finance and Accounting Volume 39, Issue 1-2, January 2012, Pages 229-263 |
Journal: | Journal of Business Finance & Accounting |
Abstract: | Basel III seeks to improve the financial sector's resilience to stress scenarios which calls for a reassessment of banks' credit risk models and, particularly, of their dependence on business cycles. This paper advocates a Mixture of Markov Chains (MMC) model to account for stochastic business cycle effects in credit rating migration risk. The MMC approach is more efficient and provides superior out-of-sample credit rating migration risk predictions at long horizons than a naïve approach that conditions deterministically on the business cycle phase. Banks using the MMC estimator would counter-cyclically increase capital by 6% during economic expansion and free up to 17% capital for lending during downturns relative to the naïve estimator. Thus, the MMC estimator is well aligned with the Basel III macroprudential initiative to dampen procyclicality by reducing the recession-versus-expansion gap in capital buffers. |
URI: | https://hdl.handle.net/20.500.14279/14693 |
ISSN: | 0306686X |
DOI: | 10.1111/j.1468-5957.2011.02272.x |
Rights: | © 2012 Blackwell Publishing Ltd. |
Type: | Article |
Affiliation : | City University London |
Publication Type: | Peer Reviewed |
Appears in Collections: | Άρθρα/Articles |
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