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Credit Risk Theoretical Model on the Base of DCC-GARCH in Time-Varying Parameters Framework

Author

Listed:
  • Nikita Moiseev

    (Department of Mathematical Methods in Economics, Plekhanov Russian University of Economics, 117997 Moscow, Russia)

  • Aleksander Sorokin

    (Department of Mathematical Methods in Economics, Plekhanov Russian University of Economics, 117997 Moscow, Russia)

  • Natalya Zvezdina

    (Department of Statistics and Data Analysis, Faculty of Economic Sciences, National Research University Higher School of Economics, 101000 Moscow, Russia)

  • Alexey Mikhaylov

    (Financial Research Institute of Ministry of Finance of the Russian Federation, 127006 Moscow, Russia)

  • Lyubov Khomyakova

    (Institute for Research of International Economic Relations, Financial University under the Government of Russian Federation, 124167 Moscow, Russia)

  • Mir Sayed Shah Danish

    (Strategic Research Projects Center, University of the Ryukyus, Nishihara, Okinawa 903-0213, Japan)

Abstract

The research paper is devoted to developing a mathematical approach for dealing with time-varying parameters in rolling window logit models for credit risk assessment. Forecasting coefficients yields a better model accuracy than a trivial approach of using computed past statistics parameters for the next time period. In this paper, a new method of dealing with time-varying parameters of scoring models is proposed, which is aimed at computing the default probability of a borrower. It was empirically shown that in a continuously changing economic environment factors’ influence on a target variable is also changing. Therefore, forecasting coefficients yields a better financial result than simply applying parameters obtained by accumulated statistics over past time periods. The paper develops a new theoretical approach, incorporating a combination of the ARIMA class model, the DCC-GARCH model and the state–space model, which is more accurate, than using only the ARIMA model. Rigorous simulation testing is provided to confirm the efficiency of the proposed method.

Suggested Citation

  • Nikita Moiseev & Aleksander Sorokin & Natalya Zvezdina & Alexey Mikhaylov & Lyubov Khomyakova & Mir Sayed Shah Danish, 2021. "Credit Risk Theoretical Model on the Base of DCC-GARCH in Time-Varying Parameters Framework," Mathematics, MDPI, vol. 9(19), pages 1-12, September.
    • Handle: RePEc:gam:jmathe:v:9:y:2021:i:19:p:2423-:d:646356
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    References listed on IDEAS

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