Are credit ratings procyclical?

C. Furfine and Jeffery Amato
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Jeffery Amato: Goldman Sachs International

No 129, BIS Working Papers from Bank for International Settlements

Abstract: This paper studies the influence of the state of the business cycle on credit ratings. In particular, we assess whether rating agencies are excessively procyclical in their assignment of ratings. Our analysis is based on a model of ratings determination that takes into account factors that measure the business and financial risks of firms, in addition to indicators of macroeconomic conditions. Utilising annual data on all US firms rated by Standard&Poor's, we find little evidence of procyclicality in ratings. By contrast, we find that initial ratings and rating changes exhibit excess sensitivity to the business cycle. The paper offers two explanations of these results.

Keywords: credit risk; rating agencies; business cycles; ordered probit; maximum likelihood (search for similar items in EconPapers)
JEL-codes: C25 C81 G20 G28 G32 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2003-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (39)

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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:129

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