An Analytic Approach to Rating Transitions
Extending CreditRisk+ to a multi-state model allows one to incorporate credit quality changes into the calculation of portfolio credit risk. Several modifications to the original methodology are proposed to make the extension to a markto-market model tractable. The distribution of portfolio value changes is obtained analytically by a two-dimensional recursion algorithm.
KeywordsRate Transition Credit Risk Poisson Approximation Indicator Vector Systematic Risk Factor
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