Can macro variables improve transition matrix:

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Transition matrices that describe the probability for firms to migrate between rating classes are important inputs in many credit risk applications. In this thesis we try to find a simple way to forecast transition matrices that reflect actual future probabilities of credit migration better than unconditional transition matrices. By conditioning on the state of the economy measured in terms of GDP-growth we find that the state of the economy has an effect on transition matrices. We use this information together with macroeconomic indicators to produce transition matrices that are conditioned on the state of the economy. We find that the simple method we present produces better tr...