scholarly journals CREDIT RISK VALUATION WITH RATING TRANSITIONS AND PARTIAL INFORMATION

2014 ◽  
Vol 17 (07) ◽  
pp. 1450046
Author(s):  
DONATIEN HAINAUT ◽  
CHRISTIAN YANN ROBERT
Keyword(s):  
Markov Chain ◽  
Credit Risk ◽  
Credit Rating ◽  
Partial Information ◽  
Secondary Market ◽  
Risk Valuation ◽  
Phase Type Distributions ◽  
Bond Issuers ◽  
Rating Transitions ◽  
Credit Migration

This work intends to shed some light on a new use of Phase-type distributions in credit risk, taking into account different flows of information without huge numerical calculations. We consider credit migration models with partial information and study the influence of a deficit of information on prices of credit linked securities. The transitions through the various credit classes are modeled via a continuous time Markov chain but they are not directly observable by investors in the secondary market. We first consider the case of one bond issuer and study three settings of partial information. In a first model, information about ratings arrives at predetermined dates with delay periods. In a second model, information arrives randomly according to an exogenous Poisson process, whereas in a third model, information arrives randomly according to an endogenous rule (transitions are observed only when they lead the Markov chain to a class with a lower credit rating). We infer in the three settings bonds and options prices, and we provide an explicit description of the dynamics of bond prices under real and pricing measures. We also consider the case of several bond issuers. We first study a model for two different issuers and analyze the cross effects of deficit of information and contagion on bonds prices and correlation of default times. We then propose a model for several homogeneous issuers. Finally, numerical illustrations show the relevance of taking into account deficits of information on prices of credit linked securities.

AssessingSukukdefaults using value-at-risk techniques

2018 ◽  
Vol 44 (6) ◽  
pp. 665-687 ◽  
Author(s):  
Nafis Alam ◽  
Muhammad Bhatti ◽  
James T.F. Wong
Keyword(s):  
At Risk ◽  
Value At Risk ◽  
Credit Rating ◽  
Secondary Market ◽  
Economic Sectors ◽  
Content Type ◽  
Rating Agencies ◽  
Bond Issuers ◽  
Research Findings ◽  
Fundamental Value

PurposeThe purpose of this paper is to investigate the default characteristics of Sukuk issues by corporate firms in Malaysia using value-at-risk (VaR) techniques over a period of 16 years from 2000 to 2015 and across nine economic sectors.Design/methodology/approachThe paper employs non-parametric and Monte Carlo simulations to estimate Sukuk defaults.FindingsThe authors analyses revealed that the VaR predictions were fairly consistent with the ratings provided by credit rating agencies, despite the limited tradability of Sukuk in the secondary market. The study was able to demonstrate that Sukuk is not riskier than conventional bonds in the Malaysian context.Research limitations/implicationsThe research findings suggested that VaR values will depend on the fundamental value of a firm based on the considerations of market, credit and operational risk. It does not rely on the type of debt instrument, whether a Sukuk or conventional bonds.Practical implicationsThe use of Sukuk along with conventional bonds as debt instruments creates opportunities for investors and bond issuers globally.Originality/valueAlthough Sukuk has generated much interest among financial market players, studies are lacking on how to predict Sukuk defaults and whether Sukuk has the same risk profile compared to conventional bonds.

scholarly journals The Effect of Reputation Shocks to Rating Agencies on Corporate Disclosures

2018 ◽  
Vol 94 (1) ◽  
pp. 299-326 ◽  
Author(s):  
Mani Sethuraman
Keyword(s):  
Credit Risk ◽  
Voluntary Disclosure ◽  
Credit Rating ◽  
Credit Ratings ◽  
Earnings Forecasts ◽  
Corporate Bond ◽  
Management Earnings Forecasts ◽  
Rating Agencies ◽  
Theoretical Predictions ◽  
Bond Issuers

ABSTRACT This paper explores the effect of a credit rating agency's (CRA) reputation on the voluntary disclosures of corporate bond issuers. Academics, practitioners, and regulators disagree on the informational role played by major CRAs and the usefulness of credit ratings in influencing investors' perception of the credit risk of bond issuers. Using management earnings forecasts as a measure of voluntary disclosure, I find that investors demand more (less) disclosure from corporate bond issuers when the ratings become less (more) credible. In addition, using content analytics, I find that bond issuers disclose more qualitative information during periods of low CRA reputation to aid investors in assessing credit risk. My findings are consistent with credit ratings providing incremental information to investors and reducing adverse selection in lending markets. Further, consistent with theoretical predictions, my findings suggest that managers rely on voluntary disclosure as a credible mechanism to reduce information asymmetry in bond markets.

On identifiability and order of continuous-time aggregated Markov chains, Markov-modulated Poisson processes, and phase-type distributions

1996 ◽  
Vol 33 (3) ◽  
pp. 640-653 ◽  
Author(s):  
Tobias Rydén
Keyword(s):  
Markov Chain ◽  
Markov Chains ◽  
Continuous Time ◽  
Poisson Processes ◽  
Hitting Times ◽  
Phase Type ◽  
Phase Type Distributions ◽  
Minimum Number ◽  
Markov Modulated ◽  
Two Parameters

An aggregated Markov chain is a Markov chain for which some states cannot be distinguished from each other by the observer. In this paper we consider the identifiability problem for such processes in continuous time, i.e. the problem of determining whether two parameters induce identical laws for the observable process or not. We also study the order of a continuous-time aggregated Markov chain, which is the minimum number of states needed to represent it. In particular, we give a lower bound on the order. As a by-product, we obtain results of this kind also for Markov-modulated Poisson processes, i.e. doubly stochastic Poisson processes whose intensities are directed by continuous-time Markov chains, and phase-type distributions, which are hitting times in finite-state Markov chains.

Bank Credit Risk Analysis and Bank Credit Rating

2020 ◽  
pp. 275-348
Author(s):  
Terence M. Yhip ◽  
Bijan M. D. Alagheband
Keyword(s):  
Risk Analysis ◽  
Credit Risk ◽  
Credit Rating ◽  
Bank Credit ◽  
Credit Risk Analysis
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