A dynamic monitoring of credit risky portfolios is described. In the first section, it is shown how a Markov dependence can be used in modelling the borrower’s behaviour: a chain of transition probabilities matrices is built in which the states of the dynamic stochastic system are the number of instalments in arrears. In the second part, such a model is generalized in the framework of the Hidden Markov Models to explain how the credit market conditions could affect the borrower’s payment process. Numerical examples complete the note.
Creditworthiness dynamics and Hidden Markov Models / L. Vannucci; L. Quirini. - In: JOURNAL OF THE OPERATIONAL RESEARCH SOCIETY. - ISSN 0160-5682. - STAMPA. - 65, No. 3:(2014), pp. 323-330. [10.1057/jors.2012.181]
Creditworthiness dynamics and Hidden Markov Models
VANNUCCI, LUIGI;
2014
Abstract
A dynamic monitoring of credit risky portfolios is described. In the first section, it is shown how a Markov dependence can be used in modelling the borrower’s behaviour: a chain of transition probabilities matrices is built in which the states of the dynamic stochastic system are the number of instalments in arrears. In the second part, such a model is generalized in the framework of the Hidden Markov Models to explain how the credit market conditions could affect the borrower’s payment process. Numerical examples complete the note.
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