Rating momentum in the macroeconomic stress testing and scenario analysis of credit risk

Considering multi-horizon macroeconomic credit loss projection models in stress testing and impairments, a challenging question is how, under stressed and best estimate economic projections, different model assumptions can affect such projections.

A recent publication by Jimmy Skoglund and Wei Chen accepted on Journal of Risk Model Validation reveals that models that do take into account the stylized fact of rating momentum can accelerate the timing of the loss significantly, compared with the non-rating-momentum case [link].