Rating Based Modeling of Credit Risk: Theory and Application of Migration Matrices doc

[...]... transition matrices to determine risk figures for credit portfolios Chapters 5, 6, and 7 are dedicated to various issues of rating transitions and the Markov chain approach in credit risk modeling Chapter 5 introduces the basic ideas of modeling migrations with transition matrices We further compare discrete and continuous-time modeling of rating migrations and illustrate the advantages of the continuous-time... mainly dedicated to the application of migration matrices in the process of calibration, valuation, and pricing of these products 1.7 Chapter Outline Chapters 2, 3, and 4 provide a rather broad view and introduction to rating based models in credit risk and the new Basel Capital Accord Chapter 2 aims to give a brief overview on rating agencies, rating systems, and an exemplary rating process Then different... serve as input data for several credit risk software models such as CreditMetrics of JP Morgan, a system that evaluates risks individually or across an entire portfolio Generally the rating agencies provide two different sorts of ratings: • Issue-specific credit ratings and • Issuer credit ratings Issue-specific credit ratings are current opinions of the creditworthiness of an obligor with respect to a... probabilities and credit curves for the pricing of credit derivatives Bluhm (2003) shows how historical one-year migration matrices can be used to determine cumulative default probabilities This so-called calibration of the credit curve can then be used for the rating of cash-flow CDO tranches In recent publications, the effect of credit migrations on issues like credit derivative pricing and rating is examined... to the determination of the expected losses, unexpected losses, and Value-at-Risk We will focus on rating based models including the reduced-form model suggested by Fons (1994) and 8 1 Introduction: Credit Risk Modeling, Ratings, and Migration Matrices extensions of the approach with respect to default intensities Then we will have a look at the industry models CreditMetrics and CreditRiskPlus In particular... time homogeneity and Markov behavior of rating migrations Generally, both assumptions should be treated with care due to the influence of the business cycle on credit migration behavior We provide a number of empirical studies examining the issues and further yielding results on rating drifts, changes in Value-at-Risk figures for credit portfolios, and on the stability of probability of default estimated... Further, the problems of embeddability and identification of generator matrices are examined and some approximation methods for generator matrices are described Finally, a section is dedicated to simulations of rating transitions using discrete time, continuous-time, and nonparametric techniques In Chapter 6 we focus on time-series behavior and stability of migration matrices Two of the major issues to... Introduction: Credit Risk Modeling, Ratings, and Migration Matrices using revealed dependencies on macroeconomic indices and interest rates Based on the cyclical behavior of migration, the literature provides some approaches to adjust, re-estimate, or change migration matrices according to some model for macroeconomic variables or observed empirical prices Different approaches suggest conditioning the matrix based. .. chain framework for multifirm credit migration while Bielecki et al (2003) concentrate on dependent migrations and defaults in a Markovian market model and the effects on the valuation of basket credit derivatives Both approaches heavily rely on the choice of an adequate transition matrix as a starting point Overall, the importance of credit transition matrices in modeling credit derivatives cannot be... Factors 15 understanding of a company’s business to a rating analyst Shortly after the issuer meeting, the industry analyst convenes a rating committee in connection with a presentation It includes analysis of the nature of the company’s business and its operating environment, evaluation of the company’s strategic and financial management, financial analysis, and a rating recommendation Once the rating is determined, . sorts of ratings: • Issue-specific credit ratings and • Issuer credit ratings Issue-specific credit ratings are current opinions of the creditworthiness of. Migration Matrices 1.1 Motivation The aim of this book is to provide a review on theory and application of migration matrices in rating based credit risk