arXiv subjects

Antoine Djogbenou

Publications and source records attributed to Antoine Djogbenou.

2 recordsLinked to original sources

arXiv2023

Composite Likelihood for Stochastic Migration Model with Unobserved Factor

We introduce the conditional Maximum Composite Likelihood (MCL) estimation method for the stochastic factor ordered Probit model of credit rating transitions of firms. This model is recommended for internal credit risk assessment procedures in banks and financial institutions under the Basel III regulations. Its exact likelihood function involves a high-dimensional integral, which can be approximated numerically before maximization. However, the estimated migration risk and required capital tend to be sensitive to the quality of this approximation, potentially leading to statistical regulatory arbitrage. The proposed conditional MCL estimator circumvents this problem and maximizes the composite log-likelihood of the factor ordered Probit model. We present three conditional MCL estimators of different complexity and examine their consistency and asymptotic normality when n and T tend to infinity. The performance of these estimators at finite T is examined and compared with a granularity-based approach in a simulation study. The use of the MCL estimator is also illustrated in an empirical application.

econ.EM↗

arXiv2022

Tests for Group-Specific Heterogeneity in High-Dimensional Factor Models

Standard high-dimensional factor models assume that the comovements in a large set of variables could be modeled using a small number of latent factors that affect all variables. In many relevant applications in economics and finance, heterogenous comovements specific to some known groups of variables naturally arise, and reflect distinct cyclical movements within those groups. This paper develops two new statistical tests that can be used to investigate whether there is evidence supporting group-specific heterogeneity in the data. The first test statistic is designed for the alternative hypothesis of group-specific heterogeneity appearing in at least one pair of groups; the second is for the alternative of group-specific heterogeneity appearing in all pairs of groups. We show that the second moment of factor loadings changes across groups when heterogeneity is present, and use this feature to establish the theoretical validity of the tests. We also propose and prove the validity of a permutation approach for approximating the asymptotic distributions of the two test statistics. The simulations and the empirical financial application indicate that the proposed tests are useful for detecting group-specific heterogeneity.

econ.EM↗