Credit Rating Methodology
The proprietary Credit Jump Rating Model (CJRating Model) is specifically designed for financial or forecasting purposes, particularly for calculating credit risk metrics of publicly traded and private companies.
The CJRating Model belongs to innovative Geometric Shot Noise Framework (GSNF) which models stock price movements by Geometric shot noise process and incorporates the market memory impact. The general premise is that Geometric Shot Noise has been used as a source of randomness instead of traditional Geometric Brownian motion to model stock prices stochastic dynamics. Regarding the market memory impact, GSNF differentiates two limit cases of market memory impact – Coherent and Memoryless markets.
Despite non-Gaussian nature of probability distributions involved and counting on market memory impact, the CJRating Model model has the same degree of analytical tractability as the well-known Merton credit risk model. This remarkable feature allows to obtain analytical closed form solutions and simplifies the numerical methods used at final stages of calculations.
The CJRating Model is implemented as a computer-based data processing system with employing our proprietary algorithms to extract and calibrate the market parameter and other data involved into the model. High performance of numerical calculations has been achieved by application of the Fast Fourier Transform method.
Depending on availability ether stock price data (for a public company) or balance sheet information (for a private company), CJRating Model utilizes three principal credit rating methodologies:
Credit Rating – Asset Jump Methodology
The CJRating Asset Jump Methodology is applicable to public companies. To calculate credit rating of a publicly traded company CJRating Model implements fundamental Geometric Shot Noise Framework for modeling behavior of the market asset value of the company as a superposition of high- and low-frequency asset jump patterns while counting on market memory impact. It offers a greater sensitivity to market granularity and brings high accuracy to calculation output than traditional Black-Scholes-Merton diffusion framework applicable to the memoryless markets only.
Credit Rating – Liquidity Jump Methodology
The CJRating Liquidity Jump Methodology is applicable to private companies which are not able to cover their short-term liabilities. To calculate probability of default of a private company in the framework of Liquidity Jump Methodology CJRating Model is fed by the data extracted from company’s balance sheet.
Credit Rating – Debt Jump Methodology
The CJRating Debt Jump Methodology is yet other methodology applicable to private companies.
To calculate probability of default for a private company in the framework of Debt Jump Methodology CJRating Model utilizes information on financial capability of a private company to make scheduled debt payments.