Are Ratings the Worst Form of Credit Assessment Apart from All the Others?

Andreas Bloechlinger and Markus Leippold ()
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Andreas Bloechlinger: Zurich Cantonal Bank

No 12-09, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We present a prediction model to forecast corporate defaults. In a theoretical model, under incomplete information in a market with publicly traded equity, we show that our approach must outperform ratings, Altman’s Z-score, and Merton’s distance to default. We reconcile the statistical and structural approaches under a common framework, i.e., our approach nests Altman’s and Merton’s approaches as special cases. Empirically, we cannot reject the superiority of our approach.Furthermore, the numbers of observed defaults align well with the estimated probabilities. Finally, with rank transforms, we obtain cycle-adjusted forecasts that still outperform ratings.

Keywords: credit rating agencies; distance to default; z-score; zeta-score; default prediction (search for similar items in EconPapers)
JEL-codes: G01 G18 G24 (search for similar items in EconPapers)
Pages: 62 pages
Date: 2012-02
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1209

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