Migration Correlation: Definition and Efficient Estimation
Les Cahiers du CREF of HEC Montréal Working Paper No. 04-13
47 Pages Posted: 18 Jul 2005
Date Written: 2004
The aim of this paper is to explain why cross-sectional estimated migration correlations displayed in the academic and professional literature can be either not consistent, or inefficient, and to discuss alternative approaches. The analysis relies on a model with stochastic migration in which the parameters of interest, that are migration correlations, are precisely defined. The impossibility of estimating consistently the migration correlations from cross-sectional data only is emphasized. We explain how to handle with individual rating histories, how to weight appropriately the cross-sectional estimators and how to estimate efficiently the joint migration probabilities at longer horizons.
Keywords: Credit risk, migration, migration correlation, stochastic transition, rating
JEL Classification: C23, C35, G11
Suggested Citation: Suggested Citation