Multivariate Ordinal Regression Models: An Analysis of Corporate Credit Ratings

Rainer Hirk, Kurt Hornik, Laura Vana Gür

Publication: Working/Discussion PaperWU Working Paper

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Abstract

Correlated ordinal data typically arise from multiple measurements on a collection of subjects. Motivated by an application in credit risk, where multiple credit rating agencies assess the creditworthiness of a firm on an ordinal scale, we consider multivariate ordinal models with a latent variable specification and correlated error terms. Two different link functions are employed, by assuming a multivariate normal and a multivariate logistic distribution for the latent variables underlying the ordinal outcomes. Composite likelihood methods, more specifically the pairwise and tripletwise likelihood approach, are applied for estimating the model parameters. We investigate how sensitive the pairwise likelihood estimates are to the number of subjects and to the presence of observations missing completely at random, and find that these estimates are robust for both link functions and reasonable sample size. The empirical application consists of an analysis of corporate credit ratings from the big three credit rating agencies (Standard & Poor's, Moody's and Fitch). Firm-level and stock price data for publicly traded US companies as well as an incomplete panel of issuer credit ratings are collected and analyzed to illustrate the proposed framework.
Original languageEnglish
Publication statusPublished - 2017

Publication series

NameResearch Report Series / Department of Statistics and Mathematics
No.132

Austrian Classification of Fields of Science and Technology (ÖFOS)

  • 502009 Corporate finance
  • 101018 Statistics

WU Working Paper Series

  • Research Report Series / Department of Statistics and Mathematics

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