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http://dx.doi.org/10.5351/KJAS.2011.24.2.253

Empirical Analysis on the Stress Test Using Credit Migration Matrix  

Kim, Woo-Hwan (Department of Economics, Yonsei University)
Publication Information
The Korean Journal of Applied Statistics / v.24, no.2, 2011 , pp. 253-268 More about this Journal
Abstract
In this paper, we estimate systematic risk from credit migration (or transition) matrices under "Asymptotic Single Risk Factor" model. We analyzed transition matrices issued by KR(Korea Ratings) and concluded that systematic risk implied on credit migration somewhat coincide with the real economic cycle. Especially, we found that systematic risk implied on credit migration is better than that implied on the default rate. We also emphasize how to conduct a stress test using systematic risk extracted from transition migration. We argue that the proposed method in this paper is better than the usual method that is only considered for the conditional probability of default(PD). We found that the expected loss critically increased when we explicitly consider the change of credit quality in a given portfolio, compared to the method considering only PD.
Keywords
Credit Risk; Basel II; asymptotic single risk factor; default rate; transition matrix; systematic risk; stress test; regulatory capital;
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