10 votes

Why would Basel III prevent price discovery at credit markets?

The argument about Basel is an adjunct to the central bank argument. There, a relatively price-insenstive CB either distorts credit by buying it directly (ECB, Fed wrt Agencies). Or distorts it ...
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  • 4,926
9 votes

How do I use machine learning to build a credit scoring model?

One excellent resource is to try Kaggle and to examine some of the competitions, some of which are specifically on the application of machine learning to credit scoring. https://www.kaggle.com/c/...
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  • 2,069
6 votes
Accepted

Calculation of the Transition matrix for Credit rating

In order to arrive at an (partial) answer, let us assume that annual credit rating transitions form a Markov chain with absorbing default state $D$. Further, let us assume that we have $K$ non-default ...
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  • 5,773
6 votes

Why investment grade floor is set at Baa3/BBB-?

The differences in credit risk between Moody's Baa2 versus Baa3 versus Ba1 versus Ba2 are all comparable. People would pay much less attention to agency ratings had the regulators not forced them to. ...
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5 votes
Accepted

Visualising credit rating stability

One option to do it is a heatmap. Not sure which software are you using, but in matlab it is extremely simple to do and powerful to tweak. Below an example. Let's assume there are 30 periods $t$ to $...
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  • 6,810
5 votes

Deriving credit spreads or migration matrices from prob of default

You cannot do it. It is an under-determined problem. That is to say, a whole multitude (subspace of $\mathbb{R}^{N\times N}$) of migration matrices will agree with any given table of default ...
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  • 14.4k
4 votes
Accepted

What structural model does Reuters use for default probability?

Reuters uses a proprietary model defined StarMine structural/SmartRatios Credit Risk model that has been developed by themselves and provided with the Reuters data service. It does not exist a formal ...
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  • 2,446
4 votes

Term structure of default probabilities without market data

Firstly it's good to straighten out our goal. You correctly say, that IFRS9 requires analysis of expected losses. There are two components of expected losses. 1) Expected probability of a default ...
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4 votes
Accepted

Could we have prevented the World Economic Crisis in 2008?

U.S. Government DID save American International Group (AIG) from bankruptcy, since it was considered too big to fail, actually: a lot of financial institutions were insured by AIG. This Investopedia ...
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  • 575
4 votes

Deriving credit spreads or migration matrices from prob of default

Actually, there is a practical way to do it. You can use you PoD estimates to assign a credit rating to your securities and then use a published transition matrix for your purposes. Or you can ...
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  • 1,335
4 votes

Why would Basel III prevent price discovery at credit markets?

Assume, for a moment, that all of the math behind modern portfolio theory is incorrect. See, for example, this video on deriving the distribution of returns. Without the normality assumption, ...
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  • 4,105
3 votes
Accepted

Credit Rating or Probability of Default from Financial Ratios

Most of the papers concern CDS spreads which you will need to convert to a PD. Paper using country specific fundamentals: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2517018 This paper uses ...
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3 votes

Why investment grade floor is set at Baa3/BBB-?

Yeah, default rate jumps considerably. For example in following, mid value of default rate jumps from 1% to 7.5 % : "COMMISSION IMPLEMENTING REGULATION (EU) 2016/1799 of 7 October 2016 laying ...
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  • 31
3 votes
Accepted

Why investment grade floor is set at Baa3/BBB-?

Cumulative default and transition rates for s&p credit ratings can be found here: https://www.spglobal.com/ratings/en/research/articles/210407-default-transition-and-recovery-2020-annual-global-...
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  • 5,325
2 votes

Are public historical time series available for ratings of sovereign debt?

In this page you have links to download all the historic data from all the agencies. https://www.wikirating.org/wiki/Portal:Data Just scroll down to the "Credit Rating Agency Ratings History Data&...
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2 votes
Accepted

Interpolating probabilities of default

I believe that your problem can be formulated as: Find PD matrix that is as close as possible to a given PD matrix (result of some previous calibration, or the matrix computed using average hazard ...
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  • 346
2 votes

Credit Rating or Probability of Default from Financial Ratios

I am also not aware of any papers in this area. But having developed many such models, I can list the important steps: Decide on the target variable: usual choices are historical default data, agency ...
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  • 121
2 votes
Accepted

Modeling credit utilization and stock market growth

Yes of course, credit rates depend on interest rates (i.e. https://en.wikipedia.org/wiki/Libor), which are set by some group of banks in almost every country Going further bankers analyze the market ...
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2 votes

Fitting transition matrices in R by solving for coefficient

You can do this using the optim function in R. One possible solution is as follows: ...
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2 votes

Could we have prevented the World Economic Crisis in 2008?

Regarding how the rating agencies gave AAA ratings to CDOs and the like that clearly did not deserve those ratings - straightforward answer. The SEC licences all the ratings agencies as "nationally ...
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  • 444
2 votes

Who pays for sovereign ratings?

The "issuer-pay" model works like this: The Rating Agency goes to the issuer and says "We heard that you are going to issue bonds. We can give you a rating if you pay us XXX dollars. It will help you ...
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  • 9,587
2 votes

How do you quantify credit risk?

If there is a CDS on the bond, that might be a good indicator to use, esp. if you want to compare one against another.
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  • 131
2 votes

Probability of default

Yes, you can. Also, do not use Altman's Z. The extreme scores are predictive, but a load of empirical research shows the intermediate values are not predictive. The best solution is a Bayesian ...
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  • 4,105
2 votes

Probability of default

Merton model will be a bit more quantitiative. Z-Score is an option, as is Ohlson. In the end you are going to want some non-defaulted->defaulted transition mapping based on factors you identify as ...
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  • 135
2 votes

Standardized numerical values for ratings

Mapping ordinal data to interval data is arbitrarily. The ranking of rating agencies is ordinal data, so only comparing operators > or ...
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  • 2,956
2 votes

Mapping internal ratings to external ratings for a scorecard

Assume your outcome/dependant variable is the rating agencies rating category, say 10 to 20 rating categories, you can use ordinal logistic regression which is more natural for this kinda problem. So ...
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1 vote

How to calculate credit spread from rating

Assuming you have a transition Matrix, you can obtain a term structure for each rating (AAA,AA,BB,etc...) by a matrix multiplication, as your transition matrix is a Markov Chain. This term Structure ...
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1 vote

Probability of default

Take a look at the Altman Z Score, sounds like it is what you are looking for - https://en.wikipedia.org/wiki/Altman_Z-score
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  • 444
1 vote

How do you quantify credit risk?

What you're looking for looks to be more in the realm of a mathematical model (specific to the company's size, available liquidity, and industry). Credit Risk Pricing Models may provide a decent ...
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  • 238
1 vote

Time series of European sovereign credit ratings by the Big Three?

Such data are provided by Bloomberg Terminal. I am positive about Moody's and S&P but not sure whether Fitch rating is also available.
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  • 61

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