A simple Markov chain structure for the evolution of credit ratings |
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Authors: | Amparo Baíllo José Luis Fernández |
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Affiliation: | Universidad Autónoma de Madrid, 28049 Madrid, Spain |
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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. |
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Keywords: | Markov chains rating transitions credit derivatives |
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