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Volume 64, Issue 3


A Duration Dependent Rating Migration Model: Real Data Application and Cost of Capital Estimation

Biase di, Giuseppe; D´Amico, Guglielmo; Janssen, Jacques; Manca, Raimondo

Year: 2014   Volume: 64   Issue: 3   Pages: 233-245

Abstract: This paper presents a duration dependent model for analyzing the evolution of credit ratings. It considers the backward recurrence process to tackle the time of permanence problem in the rating classes. In this way it is possible to manage the duration effects, which represent one of the most important features in rating dynamics. Furthermore, the paper shows how it is possible to compute the cost of capital that an organization is required to pay for the capital used in financing its activities. A real data application using Standard & Poor’s historical database is provided.

JEL classification: C63; G32

Keywords: semi-Markov models, survival analysis, default probability

RePEc: http://ideas.repec.org/a/fau/fauart/v64y2014i3p233-245.html

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