Stability of rating transitions

The distribution of ratings changes plays a crucial role in many credit risk models. As is well-known, these distributions vary across time and different issuer types. Ignoring such dependencies may lead to inaccurate assessments of credit risk. In this paper, we quantify the dependence of rating transition probabilities on the industry and domicile of the obligor, and on the stage of the business cycle. Employing ordered probit models, we identify the incremental impact of these factors. Our approach gives a clearer picture of which conditioning factors are important than comparing transition matrices estimated from different sub-samples. (C) 2000 Elsevier Science B.V. All rights reserved. JEL classification. C25; G21; G33.