Are credit ratings time-homogeneous and Markov?

Abstract. We introduce a simple approach for testing the reliability of homoge-neous generators and the Markov property of the stochastic processes underlying empirical time series of credit ratings. We analyze open access data provided by Moody’s and show that the validity of these assumptions- existence of a homoge-neous generator and Markovianity- is not always guaranteed. Our analysis is based on a comparison between empirical transition matrices aggregated over fixed time windows and candidate transition matrices generated from measurements taken over shorter periods. Ratings are widely used in credit risk, and are a key element in risk assessment; our results provide a tool for quantifying confidence in predic-tions extrapolated from these time series