Abstract #300814

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JSM 2003 Abstract #300814
Activity Number: 412
Type: Contributed
Date/Time: Wednesday, August 6, 2003 : 2:00 PM to 3:50 PM
Sponsor: Section on Risk Analysis
Abstract - #300814
Title: Structural Models for Credit Migration
Author(s): Ngai-Hang Chan*+ and Michael Wong
Companies: Chinese University of Hong Kong and Chinese University of Hong Kong
Address: Dept. of Statistics, Shatin, N.T., , , Hong Kong
Keywords: credit migration ; occupation time ; credit history ; transition probability ; structural models
Abstract:

A structural model for credit migration is considered. The proposed model is firm specific and depends on two parameters: the default distance and the credit history. The default distance is the standardized logarithmic asset-to-liability ratio modeled by a standard Brownian motion, and the credit history is modeled by an occupation time variable. By examining the properties of the occupation time variable, the credit performance of a given firm can be analyzed. This model not only allows one to dervie the closed-form credit transition probability, but also explains default probabilitiy overlaps of different credit ratings. It can also be used to back out the subjective thinking of credit performance of rating agencies.

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