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Firm's Credit Risk in the Presence of Market Structural Breaks
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These authors contributed equally to this work.
Version 1
: Received: 25 September 2018 / Approved: 27 September 2018 / Online: 27 September 2018 (03:03:41 CEST)
A peer-reviewed article of this Preprint also exists.
Xing, H.; Yu, Y. Firm’s Credit Risk in the Presence of Market Structural Breaks. Risks 2018, 6, 136. Xing, H.; Yu, Y. Firm’s Credit Risk in the Presence of Market Structural Breaks. Risks 2018, 6, 136.
Abstract
Various sudden shifts in financial market conditions over the past decades have demonstrated the significant impact of market structural breaks on firms' credit behavior. To characterize such effect quantitatively, we develop a continuous-time modulated Markov model for firms' credit rating transitions with the possibility of market structural breaks. The model takes a semi-parametric multiplicative regression form, in which the effects of firms' observable covariates and macroeconomic variables are represented parametrically and nonparametrically, respectively, and the frailty effects of unobserved firm-specific and market-wide variables are incorporated via the integration form of the model assumption. We further develop a mixtured-estimating-equation approach to make inference on the effect of market variations, baseline intensities of all firms' credit rating transitions, and rating transition intensities for each individual firm. We then use the developed model and inference procedure to analyze the monthly credit rating of U.S. firms from January 1986 to December 2012, and study the effect of market structural breaks on firms' credit rating transitions.
Keywords
credit rating transitions; mixtured estimating equations; multiplicative intensity model; structural break
Subject
Business, Economics and Management, Econometrics and Statistics
Copyright: This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
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