In many credit risk and pricing applications, credit transition matrix is modeled by a constant transition probability or generator matrix for Markov processes. Based on empirical evidence, we model rating transition processes as piecewise homogeneous Markov chains with unobserved structural...

This paper shows that volatility persistence in GARCH models and spurious long memory in autoregressive models may arise if the possibility of structural changes is not incorporated in the time series model. It also describes a tractable hidden Markov model (HMM) in which the regression...