 Market-Based Credit RatingsDrew Creal, Robert B. Gramacy and Ruey S. Tsay Journal of Business & Economic Statistics, 2014, vol. 32, issue 3, 430-444 Abstract: We present a methodology for rating in real-time the creditworthiness of public companies in the U.S. from the prices of traded assets. Our approach uses asset pricing data to impute a term structure of risk neutral survival functions or default probabilities. Firms are then clustered into ratings categories based on their survival functions using a functional clustering algorithm. This allows all public firms whose assets are traded to be directly rated by market participants. For firms whose assets are not traded, we show how they can be indirectly rated by matching them to firms that are traded based on observable characteristics. We also show how the resulting ratings can be used to construct loss distributions for portfolios of bonds. Finally, we compare our ratings to Standard & Poors and find that, over the period 2005 to 2011, our ratings lead theirs for firms that ultimately default. Date: 2014 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:taf:jnlbes:v:32:y:2014:i:3:p:430-444 Ordering information: This journal article can be ordered from DOI: 10.1080/07350015.2014.902763 Access Statistics for this article Journal of Business & Economic Statistics is currently edited by Eric Sampson, Rong Chen and Shakeeb Khan More articles in Journal of Business & Economic Statistics from Taylor & Francis Journals |
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