IRB - Migration Matrix
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We are currently running a migration matrix exercise (i.e., migration of obligors between rating grades) to assess the sensitivity of the rating model to macroeconomic changes – final goal is to
determine the rating philosophyCould you please share your thoughts on these 2 points:
- Is there an industry threshold of % of observations upgrading or downgrading at least 1 notch to determine high volatility/ sensitivity?
- Have you used another metric to assess the volatility of migrations other than deviations from the diagonal (i.e. 1 notch up or down)?
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We have been using different metrics to compare migration matrices and, depending what you’re after, these metrics might feed directly your variance measures
A nice outline is given in a paper Til [Schuermann] was writing a bit ago
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Might also be worth taking a look at the detail in sections 2.5.5.1 - 2.5.5.2 dealing with customer migrations and migration matrix stability respectively, in the ECB's Instructions for reporting the validation results of internal models, pgs. 23 - 24