PPT Slide
Difficulties in applying the historical transition matrices
• In spite of large number of observations, some measurements have
low statistical significance, particularly the investment grade default
• The observations are based on seven major rating categories.
Many applications require a finer granularity in credit levels.
• Historical observations do not reflect to the current credit environment.
• Historical observations are primarily based in the U.S. and are
inappropriate for emerging markets.
• History only provides an assessment of real probabilities. Pricing
models need probabilities which are adjusted for risk (risk neutral) and
are consistent with observed prices in the market.