Migration Risk

Migration risk is the risk that the credit quality of a debtor decreases following the lowering of credit ratings. Please note that lower credit ratings imply higher default probabilities.

Why is Migration Risk Important?

When a credit rating decreases, the present value of the underlying asset decreases, which creates a paper loss. As discussed previously, correlation risk between a reference asset and counterparty (CDS seller) is an important concern for investors. A higher correlation increases the probability of the total loss of investment.