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Stability of ratings transitions

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  • Pamela Nickell
  • William Perraudin
  • Simone Varotto

Abstract

The distribution of ratings changes plays a crucial role in many credit risk models. As is well known, these distributions vary across time and different issuer types. Ignoring such dependencies may lead to inaccurate assessments of credit risk. In this paper, a quantification is provided of the dependence of ratings transition probabilities on the industry and domicile of the obligor, and on the stage of the business cycle. The incremental impact of these factors is identified using ordered probit models. This approach gives a clearer picture (than is obtained by comparing transition matrices estimated from different sub-samples) of which conditioning factors are important.

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  • Pamela Nickell & William Perraudin & Simone Varotto, 2001. "Stability of ratings transitions," Bank of England working papers 133, Bank of England.
    • Handle: RePEc:boe:boeewp:133
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    File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/2001/wp133.pdf
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    1. Stella Cheung, 1996. "Provincial Credit Rating in Canada: An Ordered Probit Analysis," Staff Working Papers 96-6, Bank of Canada.
    2. Jean Helwege & Paul Kleiman, 1996. "Understanding aggregate default rates of high yield bonds," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 2(May).
    3. Richard Cantor & Frank Packer, 1994. "The credit rating industry," Quarterly Review, Federal Reserve Bank of New York, vol. 19(Sum), pages 1-26.
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