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A Non-Gaussian Panel Time Series Model for Estimating and Decomposing Default Risk
Year Of Publication: 2005
Month Of Publication: May
Pages: 30
Download Count: 496
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Comment Num: 0
Language: EN
Who Can Read: Free
Date: 5-25-2006
Publisher: Administrator
We model 1981–2002 annual default frequencies for a panel of US firms in different ratingand age classes from the Standard and Poor’s database. The data is decomposedinto a systematic and firm-specific risk component, where the systematic component reflectsthe general economic conditions and default climate. We have to cope with (i) theshared exposure of each age cohort and rating class to the same systematic risk factor;(ii) strongly non-Gaussian features of the individual time series; (iii) possible dynamics ofan unobserved common risk factor; (iv) changing default probabilities over the age of therating, and (v) missing observations. We propose a non-Gaussian multivariate state spacemodel that deals with all of these issues simultaneously. The model is estimated usingimportance sampling techniques that have been modified to a multivariate setting. Weshow in a simulation study that such a multivariate approach improves the performanceof the importance sample
Koopman, Siem Jan Sign in to follow this author
Lucas, Andre Sign in to follow this author
Daniels, Robert J. Sign in to follow this author
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