This is the program for the 2010 Joint Statistical Meetings in Vancouver, British Columbia.

Abstract Details

Activity Number: 174
Type: Contributed
Date/Time: Monday, August 2, 2010 : 10:30 AM to 12:20 PM
Sponsor: Business and Economic Statistics Section
Abstract - #308825
Title: Credit Rating Dynamics in the Presence of Structural Breaks
Author(s): Haipeng Xing and Ning Sun*+ and Ying Chen
Companies: State University of New York at Stony Brook and State University of New York at Stony Brook and MEAG New York
Address: Department of Applied Mathematics and Statistics, Stony Brook, NY, 11794, USA
Keywords: Credit transitions ; Hidden Markov models ; Structural Breaks

Credit transition matrices are typically modeled as a Markov process with constant transition probability or generator matrix. Based on empirical evidence, we propose a stochastic structural break model for piecewise constant rating transition matrices with unknown number, locations and magnitude of structural breaks. The proposed model provides explicit forms for the posterior distribution of the time-varying rating transition probability matrices that are mixtures of Markov chains. The model also allows us to make inference on the probability of structural break at each period and prediction of transition matrices in the presence of possible structural break. We estimate this model using credit rating histories and show that the proposed model captures indeed the structural break in credit rating transitions.

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