Sparse Structural Approach for Rating Transitions. (arXiv:1708.00062v1 [q-fin.RM])

In banking practice, rating transition matrices have become the standard approach of deriving multi-year probabilities of default (PDs) from one-year PDs, with the latter normally being available from Basel ratings. Rating transition matrices have gained in importance with the newly adopted IFRS 9 accounting standard. Here, the multi-year PDs can be used to calculate the so-called expected credit losses (ECL) over the entire lifetime of relevant credit assets.