The estimation of transition matrices for sovereign credit ratings

Rating transition matrices for sovereigns are an important input to risk management of portfolios of emerging market credit exposures. They are widely used both in credit portfolio management and to calculate future loss distributions for pricing purposes. However, few sovereigns and almost no low c...

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Bibliographic Details
Published in:Journal of banking & finance 2002-07, Vol.26 (7), p.1383-1406
Main Authors: Hu, Yen-Ting, Kiesel, Rudiger, Perraudin, William
Format: Article
Language:English
Subjects:
Credit
Credit rating
Credit ratings
Credit risk
Default
Emerging markets
Financial models
Financial risks
Ordered probit
Portfolio analysis
Portfolio management
Risk management
Sovereign debt
Sovereign default
Statistical methods
Studies
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Summary:Rating transition matrices for sovereigns are an important input to risk management of portfolios of emerging market credit exposures. They are widely used both in credit portfolio management and to calculate future loss distributions for pricing purposes. However, few sovereigns and almost no low credit quality sovereigns have ratings histories longer than a decade, so estimating such matrices is difficult. This paper shows how one may combine information from sovereign defaults observed over a longer period and a broader set of countries to derive estimates of sovereign transition matrices.
ISSN:0378-4266
1872-6372
DOI:10.1016/S0378-4266(02)00268-6