One of the most significant developments in international credit markets in recent years has been the trade in Collateralized Debt Obligations (CDO), which has enabled financial institutions to repackage the credit risk of an asset portfolio into tranches to be transferred to investors. The present paper evaluates the credit risk of such a portfolio and the related tranches by applying two prom...

Credit rating assessment is a complicated process in which many parameters describing a company are taken into consideration and a grade is assigned, which represents the reliability of a potential client. Such assessment is expensive, because domain experts have to be employed to perform the rating. One way of lowering the costs of performing the rating is to use an automated rating procedure....

In recent years, credit rating analysis has attracted lots of research interest in the literature. While the operating efficiency of a corporation is generally acknowledged to be a key contributor to the corporation’s risk, it is usually excluded from early prediction models. To verify the operating efficiency as predictive variables, we propose a novel model to integrate rough set theory (RST)...

Despite mounting evidence to the contrary, credit migration matrices, used in many credit risk and pricing applications, are typically assumed to be generated by a simple Markov process. Based on empirical evidence we propose a parsimonious model that is a mixture of (two) Markov chains, where the mixing is on the speed of movement among credit ratings. We estimate this model using credit ratin...

In this paper I test the quality of S&P corporate bonds’ ratings over the years 1983-1993. Using sample data of 2452 bonds from which 232 defaulted till year 2000, I show that narrowness of rating categories was not fully informative and that ratings were not consisted over industries and countries of incoporation. The results also reveal that S&P ratings as outlined in S&P methodology were not...

We develop a rational expectations model in which the issuer of a nancial instrument purchases credit ratings(s) in order to provide useful information to investors and attract investor demand. We examine the nature of a credit-rating equilibrium in a staged game in which an issuer purchases rating(s) sequentially and then decides which ratings to disclose. Our analysis emphasizes the importanc...

Rating agencies state that they take a rating action only when it is unlikely to be reversed shortly afterwards. Based on a formal representation of the rating process, I show that such a policy provides a good explanation for the empirical evidence: Rating changes occur relatively seldom, exhibit serial dependence, and lag changes in the issuers’ default risk. In terms of informational losses,...

In credit risk modelling, jump processes are widely used to describe both default and rating migration events. This work is mainly a review of some basic definitions and properties of the jump processes intended for a preliminary step before more advanced lectures on credit risk modelling. We focus on the Poisson process and some generalisations, like the compounded and the double stochastic Po...

Credit evaluation is one of the most important and difficult tasks for credit card companies, mortgage companies, banks and other financial institutes. Incorrect credit judgement causes huge financial losses. This work describes the use of an evolutionary-fuzzy system capable of classifying suspicious and non-suspicious credit card transactions. The paper starts with the details of the system u...