Development of a Transition Matrix Model of Credit Rating of Companies based on Forecasted Macro Factors: the Case of Greece

Abstract

Abstract In this paper, we develop a model for the rating transition matrices for corporates. These matrices quantify the credit quality of the business sector and, hence, they are related to the financial stability and growth of the economy. The main objective is to estimate how a corporate portfolio behaves under various macroeconomic conditions and (to show the link between the quality of a corporate portfolio with macro variables) and to build a new transition matrix based on specific forecasted macroeconomic variables according to IFRS 9 requirements for the calculation of ECL. The model has been developed based on historical transition rates of credit risk assessments provided by ICAP SA and historical values of various macro factors provided by Hellenic Statistical Authority (ΕΛΣΤΑΤ). JEL classification numbers: G2, M1. Keywords: Rating transition matrices, Credit quality, Business sector, Macroeconomic factors.