Predictive effect of economic and market variations on structural breaks in credit rating dynamics
نویسنده
چکیده
Recent studies have shown that firms credit rating transition process is not stationary and may have structural breaks. To study the predictability of structural breaks, we develop a predictive model for latent structural breaks in firms rating transition dynamics, using historical records of (highdimensional) economic and market fundamentals. As a large number of economic and market variables are sometimes involved in the study, we also introduce an inference procedure that select and estimate important economic factors at the same time from the high-dimensional factor space. Based on an empirical study using the U.S. firms’ credit rating transition records and the history of economic and market variations from 1986 to 2013, we demonstrate that not all structural breaks are black-swan events and some of them can be estimated and predicted up to certain extent. JEL classification: C13; C41; G12; G20
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