• The Korean Journal of Applied Statistics
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• v.22 no.3
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• pp.443-461
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• 2009

In order to overcome the lack of Korean credit rating migration data, we consider an empirical Bayes procedure to estimate credit rating migration matrices. We derive the posterior probabilities of Korean credit rating transitions by utilizing the Moody's rating migration data and the credit rating assignments from Korean rating agency as prior information and likelihood, respectively. Metrics based upon the average transition probability are developed to characterize the migration matrices and compare our Bayesian migration matrices with some given matrices. Time series data for the metrics show that our Bayesian matrices are stable, while the matrices based on Korean data have large variation in time. The bootstrap tests demonstrate that the results from the three estimation methods are significantly different and the Bayesian matrices are more affected by Korean data than the Moody's data. Finally, Monte Carlo simulations for computing the values of a portfolio and its credit VaRs are performed to compare these migration matrices.

• The Korean Journal of Applied Statistics
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• v.24 no.2
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• pp.253-268
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• 2011

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.