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A foundational approach to credit migration for stress testing and expected credit loss estimation

Author

Listed:
  • Sobehart, Jorge R.

    (Managing Director of Credit and Obligor Risk Analytics, Risk Modelling & Analytics at Citi, USA)

  • Sun, Xiaoming

Abstract

Structural regularities in the dynamics of risk ratings can be used to characterise credit migration using a few indicators of economic activity. These regularities can be used to construct plausible stress test scenarios for credit migration that include the effects of credit cycles and economic activity for different countries beyond the limitations of historical data. The approach can be used to generate a range of plausible scenarios consistent with given economic conditions and uncertainty through the credit cycle.

Suggested Citation

  • Sobehart, Jorge R. & Sun, Xiaoming, 2018. "A foundational approach to credit migration for stress testing and expected credit loss estimation," Journal of Risk Management in Financial Institutions, Henry Stewart Publications, vol. 11(2), pages 156-172, March.
    • Handle: RePEc:aza:rmfi00:y:2018:v:11:i:2:p:156-172
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    More about this item

    Keywords

    credit rating migration; stress testing; economic drivers; credit cycles;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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