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Rating Based Modeling of Credit Risk by Svetlozar T. Rachev, Stefan Trueck

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Chapter 7. Measures for Comparison of Transition Matrices

This chapter reviews the literature on distance measures or indices for credit migration matrices. It summarizes several measures based on cell-by-cell distances, eigenvalues (Geweke et al., 1986), eigenvectors (Arvanitis et al., 1999), or metrics based on singular values (Jafry and Schuermann, 2004). Finally, it derives criteria for risk-adjusted difference indices that can also be used to examine migration matrices with respect to their riskiness (Trueck, 2008) for credit portfolios. Recall from the previous chapter that transition matrices for both of the major rating agencies as well as for internal rating systems show significant variations through time and cannot be considered to ...

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