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Extracting Systematic Factors in a Continuous-time Credit Migration Model

by Harley Thompson of the Commonwealth Bank of Australia, and
Jonathan Harris of the Commonwealth Bank of Australia & Stanford University

July 2008

Abstract: We present a methodology for estimating up and down-jump intensities in a portfolio credit ratings migration model. Emphasis is given to two particular issues that arise in practice: incomplete transitions data and time-inhomogeneity in the transition intensities. Our approach is flexible and computationally fast and should prove useful in a practical context. The model is fitted to a portfolio of S&P rated corporates.

Keywords: Credit Risk, Portfolio Modelling, Ratings Migration, Markov Chains.

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