Credit Migration Risk Modelling

We consider the modelling of credit migration risk and the pricing of migrationderivatives. To construct a Point-in-Time (PIT) rating migration matrix as the underlyingvalue for derivative pricing we show first that the Affine Markov Chain models isnot sufficient to generate PIT migration matrices in both, an economic boom and contraction.We show that the introduction of rating direction and speed, which replacethe ambiguous rating drift, and the use of a Regime Shifting Markov Mixture modelboth lead to migration matrices which fit well with Point-in-Time data.[...]

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Year of publication:	2009-06-09
Authors:	Andersson, Andreas ; Vanini, Paolo
Institutions:	National Centre of Competence in ResearchFinancial Valuation and Risk Management
Subject:	Swap \| Risikomanagement \| risk management \| Kreditrisiko \| Regierungswechsel

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1 Introduction
2 Understanding the Rating Input
2.1 Credit Migration Matrices
2.2 Through-the-Cycle vs. Point-in-Time
2.3 Speed and Direction
3 Migration Matrix Model: Current Standards
3.1 The Affine Markov Chain Model
3.2 The Stochastic Time Change
3.3 The generator matrix
4 The Regime Shifting Markov Mixture Model
4.1 Generators and parameters
4.2 Dynamics of the model
4.3 Credit derivatives pricing
5 Empirical Results
6 Conclusion
References
Appendix

Persistent link: https://www.econbiz.de/10005868720