Credit ratings across asset classes: A long-Term perspective

Research output: Contribution to journalReview article

13 Citations (Scopus)

Abstract

We test whether ratings are comparable across asset classes. We examine default rates by initial rating, accuracy ratios, migration metrics, instantaneous upgrade and downgrade intensities, and rating changes over bonds' lives in multivariate regressions. These approaches reveal substantial and persistent differences across broad asset classes, as well as across subcategories of structured finance products. Our results are best explained by variation in rating agency incentives and variation in underlying risk profiles. We conclude that regulations requiring ratings to perform comparably across asset classes will prove difficult to enforce. We advocate instead a regulatory framework that better distinguishes risks and incentives across asset classes.

Original languageEnglish (US)
Pages (from-to)465-509
Number of pages45
JournalReview of Finance
Volume21
Issue number2
DOIs
StatePublished - Jan 1 2017

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Assets
Rating
Credit rating
Incentives
Rating agencies
Regulatory framework
Upgrade
Default rate
Finance
Multivariate regression

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this

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abstract = "We test whether ratings are comparable across asset classes. We examine default rates by initial rating, accuracy ratios, migration metrics, instantaneous upgrade and downgrade intensities, and rating changes over bonds' lives in multivariate regressions. These approaches reveal substantial and persistent differences across broad asset classes, as well as across subcategories of structured finance products. Our results are best explained by variation in rating agency incentives and variation in underlying risk profiles. We conclude that regulations requiring ratings to perform comparably across asset classes will prove difficult to enforce. We advocate instead a regulatory framework that better distinguishes risks and incentives across asset classes.",
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Credit ratings across asset classes : A long-Term perspective. / Cornaggia, Jess N.; Cornaggia, Kimberly J.; Hund, John E.

In: Review of Finance, Vol. 21, No. 2, 01.01.2017, p. 465-509.

Research output: Contribution to journalReview article

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AB - We test whether ratings are comparable across asset classes. We examine default rates by initial rating, accuracy ratios, migration metrics, instantaneous upgrade and downgrade intensities, and rating changes over bonds' lives in multivariate regressions. These approaches reveal substantial and persistent differences across broad asset classes, as well as across subcategories of structured finance products. Our results are best explained by variation in rating agency incentives and variation in underlying risk profiles. We conclude that regulations requiring ratings to perform comparably across asset classes will prove difficult to enforce. We advocate instead a regulatory framework that better distinguishes risks and incentives across asset classes.

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