Rating Momentum
From Open Risk Manual
Definition
Rating Momentum (also Credit Rating Momentum) denotes an empirical phenomenon / potential weakness of a Credit Rating System, whereby the current rating assigned to a Borrower does not fully capture the likelihood of transitions to other states.
In other words the history of rating changes exhibits some persistence and a credit rating move in one direction is more likely to continue in that direction.
Issues and Challenges
- Rating momentum complicates the interpretation of credit ratings as it implies an identical rating for two different borrowers may imply different likely risk profiles.
