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Time to change. Rating changes and policy implications

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  • Posch, Peter N.

Abstract

The recent financial crisis manifested the criticism to rating agencies of being slow in adjusting their rating to current conditions. This paper examines the timeliness of rating changes and identifies factors which result in ‘stickiness’ of rating actions. Knowledge of the stickiness of rating agencies is a first step in designing a more appropriate rating system. Stickiness is characterized by not adjusting the rating even when a market-based estimate of default probability changes. Extending an econometric model of friction the migration policy is modelled in terms of thresholds which have to be crossed by default probability estimates before an up- or downgrade occurs. Default probability estimates have to change by two notches before the rating agency reacts. The timeliness differs across the rating spectrum and over the years. During periods with high defaults and for low credit quality firms agencies tend to rate more timely.

Suggested Citation

  • Posch, Peter N., 2011. "Time to change. Rating changes and policy implications," Journal of Economic Behavior & Organization, Elsevier, vol. 80(3), pages 641-656.
    • Handle: RePEc:eee:jeborg:v:80:y:2011:i:3:p:641-656
    DOI: 10.1016/j.jebo.2011.06.026
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    Cited by:

    1. Andres, Christian & Betzer, André & Doumet, Markus, 2021. "Measuring changes in credit risk: The case of CDS event studies," Global Finance Journal, Elsevier, vol. 49(C).
    2. Bannier, Christina E., 2007. "Smoothing versus timeliness - wann sind stabile Ratings optimal und welche Anforderungen sind an optimale Berichtsregeln zu stellen?," Frankfurt School - Working Paper Series 84, Frankfurt School of Finance and Management.
    3. Agnello, Luca & Castro, Vítor & Sousa, Ricardo M., 2021. "On the duration of sovereign ratings cycle phases," Journal of Economic Behavior & Organization, Elsevier, vol. 182(C), pages 512-526.

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