Are market implied ratings viable alternatives to credit ratings?

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

Are market implied ratings viable alternatives to credit ratings?

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

^*Corresponding author for this work

Department of Finance and Insurance

Research output: Other Conference Contributions › Conference Paper (other) › Research › peer-review

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 language	English
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 http://www.fma.org/Vegas/

Conference

Conference	2016 Financial Management Association International (FMA) Annual Meeting
Country/Territory	United States
City	Las Vagas, Nevada
Period	19/10/16 → 22/10/16
Internet address	http://www.fma.org/Vegas/

Keywords

Credit ratings
market implied ratings
credit risk
rating gaps
rating reversals

Access to Document

http://www.fmaconferences.org/Vegas/Papers/MIR2016FMA.pdf

Cite this

@conference{460af802c47643d08b46111055552689,

title = "Are market implied ratings viable alternatives to credit ratings?",

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{\textquoteright}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.",

keywords = "Credit ratings, market implied ratings, credit risk, rating gaps, rating reversals",

author = "POON, {Winnie P. H.} and Iftekhar HASAN and Gaiyan ZHANG and Jianfu SHEN",

year = "2016",

month = oct,

day = "21",

language = "English",

note = "2016 Financial Management Association International (FMA) Annual Meeting ; Conference date: 19-10-2016 Through 22-10-2016",