Semiparametric Estimation of a Corporate Bond Rating Model

Yixiao Jiang
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Yixiao Jiang: Department of Economics, Christopher Newport University, Newport News, VA 23606, USA
Authors registered in the RePEc Author Service: Yixiao Jiang and Yixiao Jiang

Econometrics, 2021, vol. 9, issue 2, 1-20

Abstract: This paper investigates the incentive of credit rating agencies (CRAs) to bias ratings using a semiparametric, ordered-response model. The proposed model explicitly takes conflicts of interest into account and allows the ratings to depend flexibly on risk attributes through a semiparametric index structure. Asymptotic normality for the estimator is derived after using several bias correction techniques. Using Moody’s rating data from 2001 to 2016, I found that firms related to Moody’s shareholders were more likely to receive better ratings. Such favorable treatments were more pronounced in investment grade bonds compared with high yield bonds, with the 2007–2009 financial crisis being an exception. Parametric models, such as the ordered-probit, failed to identify this heterogeneity of the rating bias across different bond categories.

Keywords: semiparametric method; credit ratings; bias control; financial crisis (search for similar items in EconPapers)
JEL-codes: B23 C C00 C01 C1 C2 C3 C4 C5 C8 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:gam:jecnmx:v:9:y:2021:i:2:p:23-:d:564043

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