Before revision: We apply a Coupled Markov Chain approach to model rating transitions and thereby default probabilities of companies. We estimate parameters by applying a maximum likelihood estimation using a large set of historical ratings.
After revision: We propose a Markov chain model for credit rating changes. We do not use any distributional assumptions on the asset values of the rated companies but directly model the rating transitions process. The parameters of the model are estimated by a maximum likelihood estimation using a large set of historical ratings.