Understanding and predicting bank rating transitions using optimal survival analysis models
2013
Louis, Philippe | Van Laere, Elisabeth | Baesens, Bart
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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