Investigating Transition Matrices on U.S. Residential Mortgage-Backed Securities

The purpose of our research is to expand on the work of Kavvathas (2001) that studies credit rating transition probabilities for corporate bonds. This paper, for the period of 1991-2007 will be focused on rating transition matrices for US residential mortgage-backed securities (RMBS). In particular, we extend their techniques to a different data set and more recent time period by estimating credit rating transition matrices through the cohort method and the time-homogeneous duration method. In addition, we apply an alternative approach to calculate the average transition matrices.