A Note on Fitting Markov Operator Credit Risk Models

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A Note on Fitting Markov Operator Credit Risk Models

by Harley Thompson of Commonwealth Bank of Australia, and
Jonathan Harris of Commonwealth Bank of Australia

June 2008

Abstract: We estimate a Markov operator credit migration model in which credit conditions vary through time in response to underlying macroeconomic factors. Emphasis is given to practical issues arising when fitting the model to a portfolio of risk rated credits, including the treatment of incomplete data, accounting for portfolio regeneration and aggregation issues.

JEL Classification: G21.

Keywords: Credit Risk, Portfolio Modelling, Stochastic Time Change, Markov Operator, CGMY.

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