The movement of borrowers from one credit rating to another over time. A transition matrix gives the probability of each move.
Where you will meet it
Rating migration comes up in 4 learning outcome notes across the FRM syllabus.
A few of them:
External and Internal Credit Ratings FRM Part I · Valuation and risk models
“A rating transition matrix gives, for each starting rating in a row, the probability of being in each rating at the end of the horizon, usually one year.”
Introduction to Credit Risk Modeling and Assessment FRM Part II · Credit risk measurement and management
“CreditMetrics is a portfolio model based on rating migration.”
Estimating Default Probabilities FRM Part II · Credit risk measurement and management
“A rating migration (transition) matrix shows, for each starting rating, the probability of ending a year in each rating, including default.”
Credit Value at Risk FRM Part II · Credit risk measurement and management
“A rating transition matrix gives, for each starting rating, the probability of being in each rating class, including default, at the end of the horizon.”
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