%0 Journal Article %A Angelo Arvanitis %A Jonathan Gregory %A Jean-Paul Laurent %T Building Models for Credit Spreads %D 1999 %R 10.3905/jod.1999.319117 %J The Journal of Derivatives %P 27-43 %V 6 %N 3 %X One standard approach to analyzing credit derivatives is to set up a Markov transition matrix describing the probabilities of moving one credit class, e.g., the Moody's bond rating, to another, and potentially to a state of default. Models based on credit migration matrices have generally been rather limited in their ability to capture real-world features of credit-sensitive instruments, such as correlation between default probabilities and interest rate movements, stochastic but correlated rate spreads between credit classes, stochastic recovery rates, and within class-yield differences that depend on whether a given bond has been upgraded or downgraded. This article presents a useful general family of credit spread models that can be set up to incorporate each of these features. %U https://jod.pm-research.com/content/iijderiv/6/3/27.full.pdf