Download Corporate Bond Rating Drift: An Examination of Credit by Edward I. Altman PDF

By Edward I. Altman

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Extra resources for Corporate Bond Rating Drift: An Examination of Credit Quality Rating Changes over Time

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And ~ ( kT). , Although we concentrate on newly issued bonds, we will also present results based on the age of the bond. The Markov Chain Process The Markov chain process is a stochastic model that describes certain time series. It consists of an initial distribution of observations with a finite number of categories (or states) and the matrixes of transition (change) probabilities. The transition probability, p,(,,, is the conditional probability of being in state k at time (t), given that the observation was in state i at time (1-1); i and k are in a state space {1,2, .

Table 12 and Table 13 compare the models' estimates of upgrades and downgrades. The errors are considered to be larger than those for unchanged ratings because percentages of rating changes are much smaller than those remaining unchanged. With regard to the upgrading process, the estimate errors of the MKV-S and MKV-NS models were smaller than those of the MS model for the 1970-89 period. The MKV-NS provided the best fit up to the seven-year transition horizon. For the 10-year horizon, the MKV-S and MKV-NS performed equally well.

Most of the analytical work has naturally centered on default rates and loss estimates using traditional and mortalitylaging approaches (see Altman 1990a). An added ingredient could be an estimate of one or more years of credit-rating transitions of an investor's portfolio. We advocate using a "net" approach-considering both expected upgrades and downgrades in the estimation of expected losses. Table 19, for example, shows net changes in the proportion of new-issue A-rated and BBB-rated bonds based strictly on one-year historical experience.

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