Title: Dynamic modeling of measures of credit quality
Authors: Laura Vana - WU Wirtschaftsuniversitaet Wien (Austria) [presenting]
Abstract: Credit risk modeling including the measurement of credit quality has been intensively investigated by academics and practitioners over the past decades. The aim is to contribute to this field of research by developing a framework for jointly modeling firm failures (e.g., bankruptcies) and ordinal credit ratings as outcomes. This model, unlike prior work, simultaneously incorporates failures and credit ratings and allows inference about the quantitative relationships between these outcomes by simultaneously making use of both sources of information. A dynamic latent trait model is employed for the latent creditworthiness process underlying the rating and failure observations. Time dependent processes are defined for the systematic and idiosyncratic development of credit quality. Failure, firm-level and stock price data for publicly traded North American companies as well as issuer credit ratings from the big three rating agencies (S\&P, Moody's and Fitch) are collected and analyzed to illustrate the proposed framework. Full Bayesian inference is perfomed using MCMC methods.