Modelling credit migration

Credit models are increasingly concerned not only withthe probability of default, but also with what happensto a credit on its way to default. Attention is being focusedon the probability of moving from one creditlevel, or rating, to another. One convenient way of expressingthis information is through a transition matrix.The primary source for these probabilities has been the rating agencies.As an example, table A contains the historical frequency of annual transitionsbased on Standard & Poor’s (S&P) observations from 1981 to 1998.

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