THE PROPOSITION VALUE OF CORPORATE RATINGS - A RELIABILITY TESTING OF CORPORATE RATINGS BY APPLYING ROC AND CAP TECHNIQUES

Lis Bettina, Nessler Christian and Retzmann Jan
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Lis Bettina: University of Mainz, Germany
Nessler Christian: University of Mainz, Germany
Retzmann Jan: Deutsche Pfandbriefbank, Germany

Studies in Business and Economics, 2011, vol. 6, issue 2, 60-90

Abstract: We analyze the Altman model, a Logit model as well as the KMV model in order to evaluate their performance. Therefore, we use a random sample of 132 US firms. We create a yearly and a quarterly sample set to construct a portfolio of defaulting and a counter portfolio of non-defaulting companies. As we stay close to the recommendations of the Basel Capital Accord framework in order to evaluate the models, we use Receiver Operating Characteristic (ROC) and Cumulative Accuracy Profile (CAP) techniques. We find that the Logit model outperforms the Altman as well as the KMV model. Furthermore, we find that the Altman model outperforms the KMV model, which is nearly as accurate as a random model.

Keywords: Altman Model; Cumulative Accuracy Profile (CAP); Distance to Default; Logit Model; Moody’s KMV; Receiver Operating Characteristic (ROC); Z-score. (search for similar items in EconPapers)
Date: 2011
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