Chapter 1. Introduction - Credit Risk Modeling, Ratings, and Migration Matrices

1.1. Motivation

The aim of this book is to provide a review on theory and application of migration matrices in rating based credit risk models. In the last decade, rating based models in credit risk management have become very popular. These systems use the rating of a company as the decisive variable and not—like the formerly used structural models the value of the firm—when it comes to evaluate the default risk of a bond or loan. The popularity is due to the straightforwardness of the approach but also to the new Capital Accord (Basel II) of the Basel Committee on Banking Supervision (2001), a regulatory body under the Bank of International Settlements (BIS). Basel ...

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