medium · FRM Part 2 Credit Risk
A bank is building a 'Hazard-Rate' model for its corporate portfolio. It decides to use a 'non-homogeneous' Markov process.
What is the primary difference between this and a standard 'homogeneous' Markov process?
- In a non-homogeneous process, different obligors sharing the same rating grade can each show distinct default probabilities over time.
- In a non-homogeneous process, the rating migrations are permitted to depend on the obligor's prior transition history.
- In a non-homogeneous process, the transition matrix is not strictly required to sum to exactly 1.0 across each row.
- In a non-homogeneous process, the transition probabilities depend on the absolute time t (e.g., the phase of the credit cycle).
Sign up free to see the explanation and track your rank →
More FRM Part 2 Credit Risk practice
- According to the structural Merton model, the equity of a levered firm can be viewed as wh
- What is the primary reason why risk-neutral probabilities of default (PD) extracted from c
- A bank utilizes a 'through-the-cycle' (TTC) rating system. During a sharp economic downtur
- If the Area Under the Curve (AUC) from the Receiver Operating Characteristic (ROC) is 0.85
- A Merton-style structural credit model treats a firm's equit… — In this framework, what do
- For a derivatives portfolio, which Counterparty Credit Risk (CCR) metric is primarily used
- In the comparison of rating system philosophies, which system is characterized by stable r
- A bank's internal model for Credit Value Adjustment (CVA) us… — Why is this required by re