Generator Estimation for Transition Matrices with Applications to Credit Ratings

Abstract

The major objective of this paper is to identify conditions under which a true generator can or cannot exist for an empirically observed transition matrix. In this study, an approach to finding a valid generator has been presented and the signs to look for, when trying to choose the ‘correct’ generator, have been forwarded. Conditions for the estimation of an approximate generator when a true generator does not exist have also been explored in this paper. Finally, we have given illustrations using transition matrices published by CRISIL