Credit Ratings Across Asset Classes: A Long-Term Perspective

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...

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Bibliographic Details
Published in:Review of Finance 2017-03, Vol.21 (2), p.465-509
Main Authors: Cornaggia, Jess N., Cornaggia, Kimberly J., Hund, John E.
Format: Article
Language:English
Subjects:
Bond issues
Credit ratings
Multivariate analysis
Ratings & rankings
Regression analysis
Studies
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Summary: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.
ISSN:1572-3097
1875-824X
DOI:10.1093/rof/rfx002