medium · FRM Part 2 Credit Risk
A critic of Markovian transition matrices points out that 'Downgrade Momentum' exists, where a firm downgraded from A to BBB is more likely to be downgraded again than a firm that has been BBB for five years. This 'duration' or 'stale' effect is a violation of:
- The existence of an absorbing state
- The row-sum constraint
- The Markov Property
- Time-Homogeneity
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