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Credit migration: Generating generators

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  • Richard J. Martin

Abstract

Markovian credit migration models are a reasonably standard tool nowadays, but there are fundamental difficulties with calibrating them. We show how these are resolved using a simplified form of matrix generator and explain why risk-neutral calibration cannot be done without volatility information. We also show how to use elementary ideas from differential geometry to make general inferences about calibration stability. This the longer version of an article published by RISK (Feb 2021).

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  • Richard J. Martin, 2020. "Credit migration: Generating generators," Papers 2006.11146, arXiv.org, revised Feb 2021.
    • Handle: RePEc:arx:papers:2006.11146
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    References listed on IDEAS

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    1. Richard Martin & Yao Ma, 2018. "Emerging Market Corporate Bonds as First-to-Default Baskets," Papers 1804.09056, arXiv.org.
    2. Robert A. Jarrow & David Lando & Stuart M. Turnbull, 2008. "A Markov Model for the Term Structure of Credit Risk Spreads," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 18, pages 411-453, World Scientific Publishing Co. Pte. Ltd..
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