In the work of the Basel Committee there has been a tradition of distinguishing market from credit risk and to treat both categories independently in the calculation of risk capital. In practice positions in a portfolio depend simultaneously on both market and credit risk factors. In this case,...

Rating downgrades are known to make subsequent downgrades more likely. We analyze the impact of this 'downward momentum' on credit portfolio risk. Using S&P ratings from 1996 to 2005, we estimate a transition matrix that is insensitive to and a second matrix that is sensitive to previous...