Rating the credit rating agencies

Dror Parnes and Sagi Akron

Applied Economics, 2016, vol. 48, issue 50, 4799-4812

Abstract: We offer herein several policy tools that can assist the new Office of Credit Ratings within the Securities and Exchange Commission in assessing the quality of past credit ratings and thus measuring the inclusive competency of credit rating agencies. We propose to weigh the degrees of accuracy, consistency and total synchronization between a tested sample of past ratings and a benchmark array of flawless ratings. We also discuss various techniques to handle major discrepancies between these two arrays of credit ratings. We further explain and demonstrate the importance of different sample sizes. In addition, we present a simple approach to estimate the probability of convergence between the two matched sets of ratings under specified governing thresholds. Lastly, we illustrate the bulk of the theory with a concise empirical investigation.

Date: 2016
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DOI: 10.1080/00036846.2016.1164826

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