Rating transitions forecasting: a filtering approach

09/22/2021
by   Areski Cousin, et al.
0

Analyzing the effect of business cycle on rating transitions has been a subject of great interest these last fifteen years, particularly due to the increasing pressure coming from regulators for stress testing. In this paper, we consider that the dynamics of rating migrations is governed by an unobserved latent factor. Under a point process filtering framework, we explain how the current state of the hidden factor can be efficiently inferred from observations of rating histories. We then adapt the classical Baum-Welsh algorithm to our setting and show how to estimate the latent factor parameters. Once calibrated, we may reveal and detect economic changes affecting the dynamics of rating migration, in real-time. To this end we adapt a filtering formula which can then be used for predicting future transition probabilities according to economic regimes without using any external covariates. We propose two filtering frameworks: a discrete and a continuous version. We demonstrate and compare the efficiency of both approaches on fictive data and on a corporate credit rating database. The methods could also be applied to retail credit loans.

READ FULL TEXT

page 1

page 2

page 3

page 4

research
11/01/2022

Rating Triggers for Collateral-Inclusive XVA via Machine Learning and SDEs on Lie Groups

In this paper, we model the rating process of an entity by using a geome...
research
05/31/2022

A novel approach to rating transition modelling via Machine Learning and SDEs on Lie groups

In this paper, we introduce a novel methodology to model rating transiti...
research
07/10/2022

Multi-task Envisioning Transformer-based Autoencoder for Corporate Credit Rating Migration Early Prediction

Corporate credit ratings issued by third-party rating agencies are quant...
research
04/04/2021

Adversarial Semi-supervised Learning for Corporate Credit Ratings

Corporate credit rating is an analysis of credit risks within a corporat...
research
08/19/2022

On the Probability of Magnus Carlsen reaching 2900

How likely is it that Magnus Carlsen will achieve an Elo rating of 2900?...
research
03/08/2018

IcoRating: A Deep-Learning System for Scam ICO Identification

Cryptocurrencies (or digital tokens, digital currencies, e.g., BTC, ETH,...
research
01/14/2022

Monitoring the Economy in Real Time: Trends and Gaps in Real Activity and Prices

A mixed-frequency semi-structural model is used for estimating unobserva...

Please sign up or login with your details

Forgot password? Click here to reset