Credit migration: generating generators

A stochastic time change helps the modelling of rating transition

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Markovian credit migration models are a reasonably standard tool nowadays, but there are fundamental difficulties with calibrating them. Richard Martin shows how to resolve these difficulties using a simplified form of matrix generator. He also explains why risk-neutral calibration cannot be done without volatility information

A standard modelling framework for credit migration, introduced by Jarrow et al (1997) over 20 years ago, uses a Markov chain

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