| This thesis consists of three essays. The first essay extends Shumway's (2001) estimation technique for hazard rate models to a general case by showing that a multinomial, multiple-cycle hazard rate model can be estimated as a dynamic multinomial logistic type of model. We also provide empirical evidence showing that this new approach performs better at predicting out-of-sample credit ratings than traditional static models.; The second essay studies the effects of duration, momentum, and rating policies on credit rating changes. In contrast to previous findings, we find that the duration effect on credit rating changes is not monotonic. Further, we document that the duration effect on downgrade is mainly caused by the downgrade momentum. We also provide additional support for the argument that rating standards have become more stringent over time.; The third essay investigates whether the theoretical default probability measures calculated from Merton's (1974) structural credit risk model can provide a better way to explain and predict credit ratings than traditional statistical models. The empirical results suggest that distance-to-default is not a sufficient statistic of equity market information concerning credit quality. The information contained in the market value is not fully utilized by the structural credit risk model. |
