Lando, David and Torben Magaard Skødeberg, "Analyzing Rating Transitions and Rating Drift with Continuous Observations", Journal of Banking & Finance, Vol. 26,No. 2-3, (March 2002), pp. 423-444.
Abstract: We consider the estimation of credit rating transitions based on continuous-time observations. Through simple examples and using a large data set from Standard and Poor's, we illustrate the difference between estimators based on discrete-time cohort methods and estimators based on continuous observation. We apply semi-parametric regression techniques to test for two types of non-Markov effects in rating transitions: Duration dependence and dependence on previous rating. We find significant non-Markov effects, especially for the downgrade movements.
Keywords: Rating transitions, rating drift, Markov chains, estimation.