Footnote:
In: Journal of Financial Services Research, Vol. 37, pp. 1–23, 2010
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments November 12, 2007 erstellt
Description:
Rating downgrades are known to make subsequent downgrades more likely. We analyze the impact of this ldquo;downward momentumrdquo; on credit portfolio risk and bond portfolio management. Using Standardamp;Poor's ratings from 1996 to 2005, we apply a novel approach to estimate a transition matrix that is sensitive to previous downgrades and contrast it with an insensitive benchmark matrix. First, we find that, under representative economic conditions, investors who rely on insensitive transition matrices underestimate the momentum-sensitive Value-at-Risk (VaR), on average, by 107 basis points. Second, we show that bond portfolio managers should use our downgrade-sensitive probabilities of default as they seem to be better calibrated than momentum-insensitive estimates