Rating Momentum

From Open Risk Manual
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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.

See Also