Are market implied ratings viable alternatives to credit ratings?

Winnie P. H. POON, Iftekhar HASAN, Gaiyan ZHANG, Jianfu SHEN

Research output: Other Conference Contributions › Conference Paper (other)

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 - 21 Oct 2016
Event2016 Financial Management Association International (FMA) Annual Meeting - Rio Suites Hotel, Las Vagas, Nevada, United States
Duration: 19 Oct 2016 → 22 Oct 2016
http://www.fma.org/Vegas/

Conference

Conference2016 Financial Management Association International (FMA) Annual Meeting
CountryUnited States
CityLas Vagas, Nevada
Period19/10/16 → 22/10/16
Internet address

Fingerprint

Rating
Credit rating
Timeliness
Information asymmetry
Merton model
Stock prices
Bond prices
Politicians
Reversal
Responsiveness
Credit risk
Credit default swaps
Default probability

Keywords

  • Credit ratings
  • market implied ratings
  • credit risk
  • rating gaps
  • rating reversals

Cite this

POON, W. P. H., HASAN, I., ZHANG, G., & SHEN, J. (2016). Are market implied ratings viable alternatives to credit ratings?. Paper presented at 2016 Financial Management Association International (FMA) Annual Meeting, Las Vagas, Nevada, United States.
POON, Winnie P. H. ; HASAN, Iftekhar ; ZHANG, Gaiyan ; SHEN, Jianfu. / Are market implied ratings viable alternatives to credit ratings?. Paper presented at 2016 Financial Management Association International (FMA) Annual Meeting, Las Vagas, Nevada, United States.
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POON, WPH, HASAN, I, ZHANG, G & SHEN, J 2016, 'Are market implied ratings viable alternatives to credit ratings?', Paper presented at 2016 Financial Management Association International (FMA) Annual Meeting, Las Vagas, Nevada, United States, 19/10/16 - 22/10/16.

Are market implied ratings viable alternatives to credit ratings? / POON, Winnie P. H.; HASAN, Iftekhar; ZHANG, Gaiyan; SHEN, Jianfu.

2016. Paper presented at 2016 Financial Management Association International (FMA) Annual Meeting, Las Vagas, Nevada, United States.

Research output: Other Conference Contributions › Conference Paper (other)

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AU - SHEN, Jianfu

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N2 - 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.

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POON WPH, HASAN I, ZHANG G, SHEN J. Are market implied ratings viable alternatives to credit ratings?. 2016. Paper presented at 2016 Financial Management Association International (FMA) Annual Meeting, Las Vagas, Nevada, United States.

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