Traces of business cycles in credit-rating migrations.

• Main Authors: Dmitri Boreiko, Serguei Kaniovski, Yuri Kaniovski, Georg Pflug
• Format: Article
• Language: English
• Published: Public Library of Science (PLoS) 2017-01-01
• Series: PLoS ONE
• Online Access: http://europepmc.org/articles/PMC5398736?pdf=render

Using migration data of a rating agency, this paper attempts to quantify the impact of macroeconomic conditions on credit-rating migrations. The migrations are modeled as a coupled Markov chain, where the macroeconomic factors are represented by unobserved tendency variables. In the simplest case, these binary random variables are static and credit-class-specific. A generalization treats tendency variables evolving as a time-homogeneous Markov chain. A more detailed analysis assumes a tendency variable for every combination of a credit class and an industry. The models are tested on a Standard and Poor's (S&P's) dataset. Parameters are estimated by the maximum likelihood method. According to the estimates, the investment-grade financial institutions evolve independently of the rest of the economy represented by the data. This might be an evidence of implicit too-big-to-fail bail-out guarantee policies of the regulatory authorities.