A Coupled Markov Chain Approach to Credit Risk Modeling

Wozabal, David and Hochreiter, Ronald (2012) A Coupled Markov Chain Approach to Credit Risk Modeling. Journal of Economic Dynamics and Control, 36 (3). pp. 403-415. ISSN 0165-1889


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We propose a Markov chain model for credit rating changes. We do not use any distributional assumptions on the asset values of the rated companies but directly model the rating transitions process. The parameters of the model are estimated by a maximum likelihood approach using historical rating transitions and heuristic global optimization techniques. We benchmark the model against a GLMM model in the context of bond portfolio risk management. The proposed model yields stronger dependencies and higher risks than the GLMM model. As a result, the risk optimal portfolios are more conservative than the decisions resulting from the benchmark model.

Item Type: Article
Additional Information: To see the final version of this paper please visit the publisher's website. Access to the published version requires a subscription.
Keywords: credit risk / Markov models / ratings / conditional value-at-risk / bond portfolios
Classification Codes: JEL G11, G01, C44, C14, D81
Divisions: Departments > Finance, Accounting and Statistics > Statistics and Mathematics
Version of the Document: Accepted for Publication
Variance from Published Version: Minor
Depositing User: Dissertation Administrator
Date Deposited: 27 Mar 2012 13:42
Last Modified: 28 Jul 2020 19:47
Related URLs:
FIDES Link: https://bach.wu.ac.at/d/research/results/55710/
URI: https://epub.wu.ac.at/id/eprint/3476


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