Credit risk migration rates modeling as open systems: A micro-simulation approach

Three main conclusions can be drawn in terms of economic capital provision: (a) based on the Markovian hypothesis with a-priori absorbing state at default, the standard closed-sample method is to be abandoned for not to predict lenders' bankruptcy by construction; (b) to meet more reliable estimates along with the new regulatory standards, the sample to estimate migration rates matrices for credit risk should include either entries and exits; (c) the static eigen-decomposition standard procedure to forecast migration rates should be replaced with a stochastic process dynamics methodology while conditioning forecasts to macroeconomic scenarios.