Despite the fact that over 50 percent of all corporate bonds have different ratings from Moody's and Standard and Poor's at issuance, most bond pricing models ignore these differences of opinion. Our work compares a number of different methods of accounting for split ratings in estimating bond pricing models. We find that pricing rules that use only the Moody's or Standard and Poor's ratings produce unbiased but highly inefficient forecasts. If models rely instead on simply the higher or lower of the two ratings (but not both), greater bias is introduced with insignificant gains in efficiency. In general, the average rating is the best guide to predicting yields in terms of both bias and forecast prediction. However, the forecasting advantage from using the average rating rather than the lower rating derives almost entirely from the below-investment-grade subsample.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
file. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by Federal Reserve Bank of New York in its series Research Paper with number
9711.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)