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MCMC-based credit rating aggregation algorithm to tackle data insufficiency

Author

Listed:
  • Lapshin, Viktor

    (HSE University, Моscow;)

  • Anton, Markov

    (HSE University, Моscow;)

Abstract
This paper investigates how credit rating aggregation might lead to a more efficient estimation of key portfolio risk management metrics: expected credit losses (ECL) and risk-weighted assets (RWA). The proposed technique for credit rating aggregation is based on the Markov Chain Monte-Carlo methodology and leads to a statistically smaller variance of ECL and RWA than the naïve and distribution-based alternatives. This conclusion holds for three public datasets and four simulated studies. The paper results might be helpful for portfolios that suffer from data insufficiency or rely on external ratings for credit risk assessment: portfolios of international companies, interbank loans, and sovereign debt.

Suggested Citation

  • Lapshin, Viktor & Anton, Markov, 2022. "MCMC-based credit rating aggregation algorithm to tackle data insufficiency," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 68, pages 50-72.
    • Handle: RePEc:ris:apltrx:0458
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    References listed on IDEAS

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    More about this item

    Keywords

    credit risk; probability of default; Markov chains; migration matrices; confidence estimation; MCMC; portfolio segmentation;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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