This chapter reviews some of the approaches on adjusting migration matrices to the business cycle and illustrates the adjustment methods suggested. It illustrates the adjustment procedure for the transition matrices by a simplified example using a discrete approach. In the macro simulation approach a time series model for the macroeconomic situation is used to forecast an index Yj,t for each rating class j at time t. In the documentation of CreditPortfolioView, a continuous-time approach using generator matrices is applied. In addition to calibrating expected defaults by the systematic shift operator according to CreditPortfolioView, it is also important to calibrate the ratio of expected to unexpected default rates. Since investment grade segments tend to be less sensitive to cyclical movements, the amount of volatility of default rates, which can be described by the systematic risk models, is lower for investment grade counter parties.
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