Credit Ratings Across Asset Classes: A Long-Term Perspective

Jess N. Cornaggia, Kimberly J. Cornaggia and John E. Hund

Review of Finance, 2017, vol. 21, issue 2, 465-509

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.

Keywords: Credit ratings; Credit standard; Rating agency; Ratings comparability; Regulatory capital (search for similar items in EconPapers)
JEL-codes: D82 D83 G14 G24 G28 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (48)

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