Credit migration: Generating generators

2020/06/19 by R. J. Martin, Martin, Richard J.
Decision Sciences · Economics, Econometrics and Finance · #Computational Finance (q-fin.CP) #Credit Risk and Financial Regulations #FOS: Economics and business #Mathematical Finance (q-fin.MF) #Pricing of Securities (q-fin.PR) #Probability and Risk Models #Risk Management (q-fin.RM) #Stochastic processes and financial applications

paper · pdf · doi:10.48550/arxiv.2006.11146

openalex publication_date 2020/06/19 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28

Abstract

Markovian credit migration models are a reasonably standard tool nowadays, but there are fundamental difficulties with calibrating them. We show how these are resolved using a simplified form of matrix generator and explain why risk-neutral calibration cannot be done without volatility information. We also show how to use elementary ideas from differential geometry to make general inferences about calibration stability. This the longer version of an article published by RISK (Feb 2021).

Citations

• Nineteen Dubious Ways to Compute the Exponential of a Matrix, Twenty-Five Years Later
• Emerging Market Corporate Bonds as First-to-Default Baskets

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