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Implied Migration Rates from Credit Barrier Models Claudio Albanese

Summary: Implied Migration Rates from Credit Barrier Models
Claudio Albanese
, Oliver X. Chen
Department of Mathematics, 100 St. George Street, University of Toronto, M5S 3G3, Toronto, Canada
February 24, 2005
The risk neutral credit migration process captures quantitative information which is relevant to the
pricing theory and risk management of credit derivatives. In this article, we derive implied migration
rates by means of a recently introduced credit barrier model which is calibrated on the basis of aggre-
gate information such as credit migration rates and credit spread curves. The model is characterized by
an underlying stochastic process that represents credit quality and default events are associated to bar-
rier crossings. The stochastic process has state dependent volatility and jumps which are estimated by
using empirical migration and default rates. A risk-neutralizing drift and forward liquidity spreads are
estimated to consistently match the average spread curves corresponding to all the various ratings. The
implied migration rates obtained with our credit barrier model are then compared with those obtained
via the Jarrow-Lando-Turnbull model by the Kijima-Komoribayashi model in a detailed example.
JEL classification: G12; G14; G33
Keywords: Credit risk modelling; Credit ratings; Default probabilities; Credit spreads

The authors were supported in part by the Natural Sciences and Engineering Research Council of Canada.


Source: Albanese, Claudio - Department of Mathematics, King's College London


Collections: Mathematics