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

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Chapter 9. Conditional Credit Migrations - Adjustments and Forecasts

9.1. Overview

In Chapter 6 we illustrated methods for detecting significant differences between transition matrices. While Bangia et al. (2002) examined the stability of migration matrices of a major agency, we found that transition matrices of an internal rating system also could not be considered as being time homogeneous or a first-order Markov chain. We further investigated the substantial effects of changes in migration behavior on expected loss, VaR, and especially on confidence intervals for PDs. One finding was that, especially in times of an economic downturn, the risk of a credit portfolio can be several times higher than during an expansion of the economy. The findings ...

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