Customer Reviews

Rating Based Modeling of Credit Risk: Theory and Application of Migration Matrices (Academic Press Advanced Finance)

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This is an okay book and a thorough round up of Markov methods of bond risk management and pricing. It is a little dense for something fairly simple.

Simon Benninga's "Financial Modeling with Excel" has a single chapter with examples that covers the basic thesis here. Which is: if you do an iterated Markov chain of a bond using the historical transition probability matrix from Moody's or S&P you can get a good picture for a *portfolio* of bonds and 1) the portfolio's current value, and 2) the risk profile of the portfolio. You can also test "what if" scenarios under differing yield curves.

Wit that said, the authors are mathematicians, and a lot is said with formulas which would have been better said with 1)Excel and VBA code, or 2) Matlab code, or 3) a CD-ROM with examples.

Still, this is a thorough treatment of the subject and the best book there is on rating-based portfolio and risk analysis of bonds. The knotty question of whether one "BB" rating is strictly and robustly comparable to another "BB" is left to Moody's and S&P to defend (bucket-based ratings are always under attack, horizons are not comparable for same-rated bonds in differing industries, for example, etc.).