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

CORE Recommender
Sorry the service is unavailable at the moment. Please try again later.
Show full item record

SCOPUSTM   
Citations

31
checked on Mar 14, 2024

WEB OF SCIENCETM
Citations

31
Last Week
0
Last month
0
checked on Oct 29, 2023

Page view(s)

428
Last Week
2
Last month
9
checked on Apr 28, 2025

Google ScholarTM

Check

Altmetric


Items in KTISIS are protected by copyright, with all rights reserved, unless otherwise indicated.