Bayesian Inference for Issuer Heterogeneity in Credit Ratings Migration∗

∗We appreciate feedback from the audience/discussants at the following conferences : Symposium on Credit Risk (Gutmann Center, Vienna, 2007), Annual Derivatives Securities and Risk Management Conference (FDIC, Washington D.C., 2007), Credit Risk Conference (ISCTE, Lisbon, 2007), Credit Risk Workshop (Cass Business School, London, 2006) and Quantitative Methods in Finance (UT Sydney, 2005). In particular, we would like to thank Ana-Maria Fuertes, M. Nazmul Hasan, Shelagh Heffernan, Wenying Jiangli, Aneel Keswani, Meziane Lasfer, Gulnur Muradoglu, Min Qi, Alexander Reisz, Anthony Saunders, Til Schuermann, Anand Srinivasan and Stuart Turnbull for specific helpful comments. Excellent research assistance was provided by Helder Palaro. We are grateful to two anonymous referees for their valuable suggestions on improving the paper. We accept responsibility for all remaining errors. †Corresponding author. Address: 106 Bunhill Row, London EC1Y 8TZ, United Kingdom. Email:[email protected] Phone: +44-20-7040-8632