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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.
|Publication status||Published - 21 Oct 2016|
|Event||2016 Financial Management Association International (FMA) Annual Meeting - Rio Suites Hotel, Las Vagas, Nevada, United States|
Duration: 19 Oct 2016 → 22 Oct 2016
|Conference||2016 Financial Management Association International (FMA) Annual Meeting|
|City||Las Vagas, Nevada|
|Period||19/10/16 → 22/10/16|
- Credit ratings
- market implied ratings
- credit risk
- rating gaps
- rating reversals
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- 1 Finished
POON, P. H. W., HASAN, I. & ZHANG, G.
1/01/15 → 31/12/17
Project: Grant Research