Abstract
Credit rating plays a critical role in financial risk management. It is like a name tag of a firm indicating its health condition. Generally, ratings involve a lot of firm-specific information which is hard to obtain or only available quarterly. In this chapter, we propose a two-step algorithm involving ARIMA-GARCH modelling and clustering to obtain a market based credit rating utilizing easily obtained public information. The algorithm is applied to 3-year CDS spreads of 247 publicly listed firms. Empirical result of the application and comparisons between the obtained ratings with the ratings given by agencies show that such a market based credit rating performs quite well.
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Tsay, R.S., Zhu, H. (2017). Market Based Credit Rating and Its Applications. In: Härdle, W., Chen, CH., Overbeck, L. (eds) Applied Quantitative Finance. Statistics and Computing. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-662-54486-0_7
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DOI: https://doi.org/10.1007/978-3-662-54486-0_7
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