Are credit ratings procyclical?
AbstractThis paper studies the influence of the state of the business cycle on credit ratings. In particular, we assess whether rating agencies are excessively procyclical in their assignment of ratings. Our analysis is based on a model of ratings determination that takes into account factors that measure the business and financial risks of firms, in addition to indicators of macroeconomic conditions. Utilising annual data on all US firms rated by Standard&Poor's, we find little evidence of procyclicality in ratings. By contrast, we find that initial ratings and rating changes exhibit excess sensitivity to the business cycle. The paper offers two explanations of these results.
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Bibliographic InfoPaper provided by Bank for International Settlements in its series BIS Working Papers with number 129.
Length: 41 pages
Date of creation: Feb 2003
Date of revision:
credit risk; rating agencies; business cycles; ordered probit; maximum likelihood;
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- Nickell, Pamela & Perraudin, William & Varotto, Simone, 2000.
"Stability of rating transitions,"
Journal of Banking & Finance, Elsevier,
Elsevier, vol. 24(1-2), pages 203-227, January.
- Dimson, Elroy, 1979. "Risk measurement when shares are subject to infrequent trading," Journal of Financial Economics, Elsevier, Elsevier, vol. 7(2), pages 197-226, June.
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