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Understanding and predicting bank rating transitions using optimal survival analysis models
Louis, Philippe Van Laere, Elisabeth Baesens, Bart
Louis, Philippe
Van Laere, Elisabeth
Baesens, Bart
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Publication Type
Journal article with impact factor
Editor
Supervisor
Publication Year
2013
Journal
Economics Letters
Book
Publication Volume
119
Publication Issue
3
Publication Begin page
280
Publication End page
283
Publication NUmber of pages
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Abstract
In the aftermath of the financial crisis, this study investigates which underlying determinants cause bank rating transitions. We develop survival analysis models to explain credit transition hazards using macroeconomic factors and the rating history. We find that there exists a significant dependence of rating upgrade or rating downgrade transition hazards on rating-specific covariates and macro-economic covariates. Our results confirm the momentum effect, meaning that a financial institution that has been recently upgraded/downgraded has a higher chance of being upgraded/downgraded again. The predictive performance of the developed models turns out to be satisfactory.
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Keywords
Accounting & Finance, Rating Transitions, Survival Analysis, Rating-specific and Macro-economic Covariates, Prediction Accuracy