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A simple Markov chain structure for the evolution of credit ratings
Author(s) -
Baíllo Amparo,
Fernández José Luis
Publication year - 2007
Publication title -
applied stochastic models in business and industry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.413
H-Index - 40
eISSN - 1526-4025
pISSN - 1524-1904
DOI - 10.1002/asmb.685
Subject(s) - markov chain , tridiagonal matrix , simple (philosophy) , generator (circuit theory) , focus (optics) , mathematics , markov process , computer science , mathematical optimization , mathematical economics , statistics , thermodynamics , physics , power (physics) , philosophy , eigenvalues and eigenvectors , quantum mechanics , optics , epistemology
Abstract We focus on continuous Markov chains as a model to describe the evolution of credit ratings. In this work it is checked whether a simple, tridiagonal type of generator provides a good approximation to a general one. Three different tridiagonal approximations are proposed and their performance is checked against two generators, corresponding to a volatile and a stable period, respectively. Copyright © 2007 John Wiley & Sons, Ltd.