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Migration Dependence Among the US Business Sectors

by Oussama Chakroun of HEC Montréal

June 20, 2007

Abstract: Based on the methodology of Jafry and Schuermann (2004) to summarize the rating transition matrix into a scalar (a mobility index), we build up time series of theses indices for each U.S. business sector. The database used consists on rating transitions reported by Moody's from the first quarter of 1980 to the first quarter of 2005. As a first step, we check if the mobility index used captures some stylized facts. For instance, we confirm the existence of rating momentum effects for the majority of U.S. business sectors. Then, we test for possibly crisis transmission phenomenon among sectors by estimating a Markov Switching Vector Autoregressions model. The results obtained provide evidence of high and low correlation regimes and prove default contagion among some sectors. For example, an increase of downgrades in the U.S. industrial sector during the high correlation regime implies more downgrades in the U.S. banking sector during the next three months.

JEL Classification: C32, G33.

Keywords: Credit rating transition matrices, mobility index, credit contagion.

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