publication . Preprint . Article . 2005

Predicting Agency Rating Migrations with Spread Implied Ratings

Simone Varotto; Jianming Kou;
Open Access
  • Published: 01 Jun 2005
Abstract
Investors traditionally rely on credit ratings to price debt instruments. However, rating agencies are known to be prudent in their approach to rating revisions, which results in delayed ratings adjustments to mutating credit conditions. For a large set of eurobonds we derive credit spread implied ratings and compare them with the ratings issued by rating agencies. Our results indicate that spread implied ratings often anticipate future movement of agency ratings and hence could help track credit risk in a more timely manner. This finding has important implications for risk managers in banks who, under the new Basel 2 regulations, have to rely more on credit rat...
Subjects
free text keywords: credit rating, spread implied rating, credit risk, jel:C20, jel:G11, jel:G23, jel:G33, Credit risk, Business, Credit history, Credit crunch, Finance, business.industry, Credit valuation adjustment, Credit enhancement, Credit rating, Credit reference, Actuarial science, Bond credit rating
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