Markov Chain Approach for Measuring Credit Rating Migration Risks

In this chapter, we model credit rating migrations and default events, with intensity, in a Markov chain with a transformation state matrix, in discrete and continuous time. A theoretical framework about credit migration is shown. Different ratings can be treated as different states of a Markov chain, which can be turned to a PDE system of exogenous variables. Different estimating methods for credit migration matrices are presented.