Are market implied ratings viable alternatives to credit ratings?

Winnie POON, Iftekhar HASAN, Gaiyan ZHANG, JIanfu SHEN

Research output: Other Conference ContributionsPresentationPresentation

Abstract

This is the first comprehensive study to examine how market implied ratings (MIRs) perform relative to credit ratings (CRs) with respect to timeliness, responsiveness and stability for the period of 2002-2014. Our results suggest that MIRs derived from credit default swaps, bonds and stock prices lead CRs in general. MIRs are more responsive to credit risk measured by the expected default probability (EDP) calculated from Merton’s model (Merton, 1974). Rating gaps are larger when information asymmetry is more severe. Moreover, rating gaps help predict credit rating events. However, MIRs are less stable than CRs, measured by rating reversals. The results have important implications to regulators, policymakers, and market participants in the use of CRs and its possible market implied alternatives.
Original languageEnglish
Publication statusPublished - 27 Jun 2016
EventThe 23rd Annual Conference of the Multinational Finance Society (MFS) - Stockholm Business School, Stockholm, Sweden
Duration: 26 Jun 201629 Jun 2016
http://www.mfsociety.org/page.php?pageID=302

Conference

ConferenceThe 23rd Annual Conference of the Multinational Finance Society (MFS)
CountrySweden
CityStockholm
Period26/06/1629/06/16
Internet address

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POON, W., HASAN, I., ZHANG, G., & SHEN, JI. (2016). Are market implied ratings viable alternatives to credit ratings?. The 23rd Annual Conference of the Multinational Finance Society (MFS), Stockholm, Sweden.