Chapter 5. Migration Matrices and the Markov Chain Approach
Jarrow et al. (1997) (hereafter JLT) were the first to model default and transition probabilities by using a Markov chain on a finite state space
The model and its relevance for determining risk-neutral migration matrices will be descibed in more detail in Chapter 8. Here we will concentrate on the definition and properties of discrete and continuous-time transition matrices.
5.1. The Markov Chain Approach
The state space S represents the different rating classes. Hereby, state S = 1 denotes the best credit rating; state K represents the default case. Hence, in the discrete case, the ...
Get Rating Based Modeling of Credit Risk now with the O’Reilly learning platform.
O’Reilly members experience books, live events, courses curated by job role, and more from O’Reilly and nearly 200 top publishers.
