Ratings transition matrices
David Munves, managing director of the credit strategy group at Moody's in New York, explains how investors can take advantage of a new approach to a market standard
Credit rating transition matrices form a little noticed yet vital part of many financial models. Based on historical data, transition matrices measure how quickly ratings can be expected to move from one rating category to another. Usually nothing happens. For example, on average 70% of issuers rated Baa3 today will have Baa3 ratings a year from now, while 12% of all Baa3-rated entities will be upgraded, 12% will be downgraded, and 6% will have their ratings withdrawn.
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