Assessing the credit risk of bank loans using an extended Markov chain model

in EconLit (Economic Literature Database), 經濟文獻資料庫(EconLit)
標題Assessing the credit risk of bank loans using an extended Markov chain model
Authors, 呂素蓮
出版日期2012 / 1

In this paper, we adopted a continuous-time non-homogeneous mover-stayer
model for the measurement of the credit risk associated with bank loans. This
model is an extension of a Markov chain model. Furthermore, we extracted the
time varying risk premium to convert the mover-stayer model to a risk-neutral
mover-stayer model.
This paper draws a number of conclusions and makes a number of important
contributions. First, we determined that the mover-stayer model is better suited
than the Markov chain model in estimating the credit risk of loans, according to
likelihood ratio statistics. Second, we found that borrowers of investment grades
are less likely to remain at their original rating. On the other hand, rating classes
had a strong tendency to be downgraded, inferring the likelihood that downgrade
momentum is an element of rating behavior. However, rating migration did not
indicate the existence of upgrade momentum. Third, we estimated time-varying
risk premium to transfer transition matrices to risk-neutral transition matrices.Fourth, estimated default probabilities match business cycle indicators particularly
well. Finally, estimation procedures are easy to follow and implement.
Consequently, the findings in this study have important implications for the
management of risk assumed by financial institutions.

期刊名稱Journal of Applied Finance and Banking
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