Reinforced urn processes for credit risk models

Stefano Peluso, Antonietta Mira, Pietro Muliere

Research output: Contribution to journalArticle

7 Citations (Scopus)

Abstract

We propose a Bayesian nonparametric model to estimate rating migration matrices and default probabilities using the reinforced urn processes (RUP) introduced in Muliere et. al (2000). The estimated default probability becomes our prior information in a parametric model for the prediction of the number of bankruptcies, with the only assumption of exchangeability within rating classes. The Polya urn construction of the transition matrix justifies a Beta distributed de Finetti measure. Dependence among the processes is introduced through the dependence among the default probabilities, with the Bivariate Beta Distribution proposed in Olkin and Liu (2003) and its multivariate generalization.
Original languageEnglish
Pages (from-to)1-12
Number of pages12
JournalJournal of Econometrics
Volume184
DOIs
Publication statusPublished - 2015

Keywords

  • Default rate estimation
  • Multivariate Beta distribution
  • Polya urn
  • Rating migration matrix estimation
  • Reinforced urn processes

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