Forecasting US bond default ratings allowing for previous and initial state dependence in an ordered probit model

Mizen, P. and Tsoukas, S. (2012) Forecasting US bond default ratings allowing for previous and initial state dependence in an ordered probit model. International Journal of Forecasting, 28(1), pp. 273-287. (doi:10.1016/j.ijforecast.2011.07.005)

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Abstract

In this paper we investigate the ability of a number of different ordered probit models to predict ratings based on firm-specific data on business and financial risks. We investigate models based on momentum, drift and ageing and compare them against alternatives that take into account the initial rating of the firm and its previous actual rating. Using data on US bond issuing firms rated by Fitch over the years 2000 to 2007 we compare the performance of these models in predicting the rating in-sample and out-of-sample using root mean squared errors, Diebold-Mariano tests of forecast performance and contingency tables. We conclude that initial and previous states have a substantial influence on rating prediction.

Item Type:Articles
Status:Published
Refereed:Yes
Glasgow Author(s) Enlighten ID:Tsoukas, Professor Serafeim
Authors: Mizen, P., and Tsoukas, S.
Subjects:H Social Sciences > HG Finance
H Social Sciences > HA Statistics
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:International Journal of Forecasting
Publisher:International Institute of Forecasters
ISSN:0169-2070
Copyright Holders:Copyright © 2011 International Institute of Forecasters
First Published:First published inInternational Journal of Forecasting 28(1):273-287
Publisher Policy:Reproduced in accordance with the copyright policy of the publisher

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