A score-test on measurement errors in rating transition times

Sebastian Voß and Rafael Weißbach

Journal of Econometrics, 2014, vol. 180, issue 1, 16-29

Abstract: We model credit rating histories as continuous-time discrete-state Markov processes. Infrequent monitoring of the debtors’ solvency will result in erroneous observations of the rating transition times, and consequently in biased parameter estimates. We develop a score test against such measurement errors in the transition data that is independent of the error distribution. We derive the asymptotic χ2-distribution for the test statistic under the null by stochastic limit theory. The test is applied to an international corporate portfolio, while accounting for economic and debtor-specific covariates. The test indicates that measurement errors in the transition times are a real problem in practice.

Keywords: Measurement error; Multiple spells; Rating; Score (search for similar items in EconPapers)
JEL-codes: C41 C52 G33 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:180:y:2014:i:1:p:16-29

DOI: 10.1016/j.jeconom.2014.01.004

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