ENBIS-8 in Athens

21 – 25 September 2008 Abstract submission: 14 March – 11 August 2008

Migration in Structural Credit Rating Models

22 September 2008, 14:20 – 14:40

Abstract

Submitted by
Panagiotis Avramidis
Authors
Dr P. Avramidis
Abstract
Credit rating migration plays an important role in bank's regulatory and economic capital calculations. Beside the well recognized factors affecting migration, such as macroeconomic conditions and sector, we examine the impact of the underlying credit rating model on the level of migration. We focus on assessing the migration differences of two of the most popular structural credit risk models in corporate lending, the Merton's Distance to Default and the Econometric Model using the Logit function. The results from the simulation study show that migration between the two models can be substantially different for certain parameter values. The consequencies of this claim on a Bank's regulatory capital are significant, as higher mobility under certain macroeconomic conditions will imply higher capital requirements.
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