Page 64 - Special Topic Session (STS) - Volume 2

STS459 Gan C.P. et al.

Figure 3.1 The estimated probability that the future rating is 7, 8, and 9,
respectively, for Company 6, given the interest rate for present quarter, and the
ratings for previous and present quarters are both equal to 8.

We have obtained the plot (not presented here) of the value of the -th
(1 ≤ ≤ , = 4) latent factor with the probability of Company 2 staying in
∗
∗
rating 10 given that its ratings in the previous and present quarters are both
10. The plots when = 1 and 3 show obvious variation of the probability of
staying in rating 10 when the first and third latent factors vary.
The similar plots for other companies with given ratings in the previous
and present quarters are expected to exhibit variation of transition
probabilities when the values of some of the latent factors vary. The
explanatory power shown by the latent factors is consistent with the previous
finding that some of the individual macroeconomic variables have effects on
the credit risk.

4. Discussion and Conclusion
The latent factors extracted from the Taiwan macroeconomic variables
exhibit an explanatory power over the credit risk. It might be possible to use
the predicted probabilities in a number of consecutive quarters to get an
indication of the possible transition of rating in the near future. It is also
possible that the latent factors extracted from the macroeconomic variables in
other countries will also help to give a better prediction of the credit risk.

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