Rating Based Modeling of Credit Risk

Chapter 6. Stability of Credit Migrations

This chapter is dedicated to the examination of the stability of rating migration with the focus on credit transition matrices. After a first glance at rating behavior through the business cycle, we will provide tests for two major assumptions that are often made about transition matrices: time homogeneity and Markov behavior. Generally, both assumptions should be treated with care. Several studies have shown that migration matrices are not homogeneous through time and that also the assumption of first-order Markov behavior is rather questionable; see, e.g., Bangia et al. (2002), Jafry and Schuermann (2004), Krüger et al (2005), Nickell et al (2000), Weber et al. (1998). As a major reason for this, many ...