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Observation Driven Mixed-Measurement Dynamic Factor Models with an Application to Credit Risk

Author

Listed:
  • Drew Creal

    (University of Chicago, Booth School of Business)

  • Bernd Schwaab

    (European Central Bank)

  • Siem Jan Koopman

    (VU University Amsterdam)

  • Andre Lucas

    (VU University Amsterdam)

Abstract

This paper led to a publication in the 'Review of Economics and Statistics' , 2014, 96(5), 898-915. We propose an observation-driven dynamic factor model for mixed-measurement and mixed-frequency panel data. Time series observations may come from a range of families of distributions, be observed at different frequencies, have missing observations, and exhibit common dynamics and cross-sectional dependence due to shared dynamic latent factors. A feature of our model is that the likelihood function is known in closed form. This enables parameter estimation using standard maximum likelihood methods. We adopt the new framework for signal extraction and forecasting of macro, credit, and loss given default risk conditions for U.S. Moody's-rated firms from January 1982 to March 2010.

Suggested Citation

  • Drew Creal & Bernd Schwaab & Siem Jan Koopman & Andre Lucas, 2011. "Observation Driven Mixed-Measurement Dynamic Factor Models with an Application to Credit Risk," Tinbergen Institute Discussion Papers 11-042/2/DSF16, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20110042
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    panel data; loss given default; default risk; dynamic beta density; dynamic ordered probit; dynamic factor model;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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