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An alternative methodology for estimating credit quality transition matrices
This study presents an alternative method of estimating credit quality transition matrices using a hazard function model. The model is useful both for testing the validity of the Markovian assumption, frequently made in credit rating applications, and also for estimating transition matrices conditioning on firm-specific and macroeconomic covariates that influence the migration process. The model presented in the paper is likely to be useful in other applications, although extrapolating numerical values of the coefficients outside of the present context is not recommended. Transition matrices estimated this way may be an important tool for a credit risk administration system, in the sense that a practitioner can use them to forecast the future behaviour of clients' ratings, and their possible change of state.
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José E. Gómez-González holds a PhD in economics from Cornell University. Currently he is the Director of Markets Operations and Development at the Central Bank of Colombia.
Paola Morales Acevedo holds an MA in industrial engineering from Universidad de los Andes. She is an economist in the Department of Financial Stability at the Central Bank of Colombia.
Fernando Pineda García holds an MA in finance from Universidad Eafit. He is a senior economist in the Department of Financial Stability at the Central Bank of Colombia.
Nancy Zamudio Gómez holds an MA in finance from the University of Illinois. She is a senior economist in the Department of Financial Stability at the Central Bank of Colombia.
CitationGómez-González, José E., Acevedo, Paola Morales, García, Fernando Pineda and Gómez, Nancy Zamudio (2009, September 1). An alternative methodology for estimating credit quality transition matrices. In the Journal of Risk Management in Financial Institutions, Volume 2, Issue 4.