Credit ratings and credit risk

Jens Hilscher and Mungo Wilson ()
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Mungo Wilson: University of Oxford

No 31, Working Papers from Brandeis School of Business and Economics

Abstract: This paper investigates the information in corporate credit ratings. We examine the extent to which firms' credit ratings measure raw probability of default as opposed to systematic risk of default, a firm's tendency to default in bad times. We find that credit ratings are dominated as predictors of corporate failure by a simple model based on publicly available financial information (`failure score'), indicating that ratings are poor measures of raw default probability. However, ratings are strongly related to a straightforward measure of systematic default risk: the sensitivity of firm default probability to its common component (`failure beta'). Furthermore, this systematic risk measure is strongly related to credit default swap risk premia. Our findings can explain otherwise puzzling qualities of ratings.

Keywords: Credit Rating; Credit Risk; Default Probability; Forecast Accuracy; Systematic Default Risk (search for similar items in EconPapers)
JEL-codes: G12 G24 G33 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2011-06
New Economics Papers: this item is included in nep-ban, nep-bec, nep-cfn and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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