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A simple Markov chain structure for the evolution of credit ratings

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  • Amparo Baíllo
  • José Luis Fernández

Abstract

We focus on continuous Markov chains as a model to describe the evolution of credit ratings. In this work it is checked whether a simple, tridiagonal type of generator provides a good approximation to a general one. Three different tridiagonal approximations are proposed and their performance is checked against two generators, corresponding to a volatile and a stable period, respectively. Copyright © 2007 John Wiley & Sons, Ltd.

Suggested Citation

  • Amparo Baíllo & José Luis Fernández, 2007. "A simple Markov chain structure for the evolution of credit ratings," Applied Stochastic Models in Business and Industry, John Wiley & Sons, vol. 23(6), pages 483-492, November.
    • Handle: RePEc:wly:apsmbi:v:23:y:2007:i:6:p:483-492
    DOI: 10.1002/asmb.685
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    Cited by:

    1. Puneet Pasricha & Dharmaraja Selvamuthu & Guglielmo D’Amico & Raimondo Manca, 2020. "Portfolio optimization of credit risky bonds: a semi-Markov process approach," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 6(1), pages 1-14, December.
    2. Guglielmo D’Amico, 2015. "Rate of Occurrence of Failures (ROCOF) of Higher-Order for Markov Processes: Analysis, Inference and Application to Financial Credit Ratings," Methodology and Computing in Applied Probability, Springer, vol. 17(4), pages 929-949, December.

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