A foundational approach to credit migration for stress testing and expected credit loss estimation

Jorge R. Sobehart and Xiaoming Sun
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Jorge R. Sobehart: Managing Director of Credit and Obligor Risk Analytics, Risk Modelling & Analytics at Citi, USA

Journal of Risk Management in Financial Institutions, 2018, vol. 11, issue 2, 156-172

Abstract: Structural regularities in the dynamics of risk ratings can be used to characterise credit migration using a few indicators of economic activity. These regularities can be used to construct plausible stress test scenarios for credit migration that include the effects of credit cycles and economic activity for different countries beyond the limitations of historical data. The approach can be used to generate a range of plausible scenarios consistent with given economic conditions and uncertainty through the credit cycle.

Keywords: credit rating migration; stress testing; economic drivers; credit cycles (search for similar items in EconPapers)
JEL-codes: E5 G2 (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:aza:rmfi00:y:2018:v:11:i:2:p:156-172

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