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Conditional Sovereign Transition Probability Matrices

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  • Ahmet Perilioglu

    (Ahmet Perilioglu)

Abstract

Increase of credit derivative transaction volumes and credit related exposures in trading books, contingent effect of the recent financial crisis along with insufficient measure of so called Value At Risk calculations raised new methodologies for credit risk models as well as input parameters such as transition probability matrices. Conditional transition probability matrices are one of the main input of the credit risk models and it is required to estimate for short liquidity horizons. This study presents conditional transition probability matrices for sovereigns using factor modelling approaches under various symmetric and asymmetric distribution assumptions. Asymmetric models are found to provide superior results over the symmetric models for both in sample and out of sample results. Furthermore, the proposed methodology is applicable for quarterly sovereign transitions where rating movements are not observed frequently. Finally the model incorporates the dependence of the business cycles to the estimated credit cycle indices using main macroeconomic factors.

Suggested Citation

  • Ahmet Perilioglu, 2015. "Conditional Sovereign Transition Probability Matrices," Proceedings of Economics and Finance Conferences 2204981, International Institute of Social and Economic Sciences.
    • Handle: RePEc:sek:iefpro:2204981
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    File URL: https://iises.net/proceedings/4th-economics-finance-conference-london/table-of-content/detail?cid=22&iid=047&rid=4981
    File Function: First version, 2015
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    Citations

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    Cited by:

    1. D’Amico, Guglielmo & Scocchera, Stefania & Storchi, Loriano, 2018. "Financial risk distribution in European Union," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 505(C), pages 252-267.
    2. Guglielmo D'Amico & Filippo Petroni & Philippe Regnault & Stefania Scocchera & Loriano Storchi, 2019. "A copula based Markov Reward approach to the credit spread in European Union," Papers 1902.00691, arXiv.org.
    3. Tamás Kristóf, 2021. "Sovereign Default Forecasting in the Era of the COVID-19 Crisis," JRFM, MDPI, vol. 14(10), pages 1-24, October.

    More about this item

    Keywords

    Transition probability; Credit rating; Credit risk; Sovereign debts; Business Cycles;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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