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Predicting Agency Rating Migrations with Spread Implied Ratings

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Author Info

  • Jianming Kou

    ()
    (ICMA Centre, University of Reading)

  • Dr Simone Varotto

    ()
    (ICMA Centre, University of Reading)

Abstract

Investors traditionally rely on credit ratings to price debt instruments. However, rating agencies are known to be prudent in their approach to rating revisions, which results in delayed ratings adjustments to mutating credit conditions. For a large set of eurobonds we derive credit spread implied ratings and compare them with the ratings issued by rating agencies. Our results indicate that spread implied ratings often anticipate future movement of agency ratings and hence could help track credit risk in a more timely manner. This finding has important implications for risk managers in banks who, under the new Basel 2 regulations, have to rely more on credit ratings for capital allocation purposes, and for portfolio managers who face rating-related investment restrictions.

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Bibliographic Info

Paper provided by Henley Business School, Reading University in its series ICMA Centre Discussion Papers in Finance with number icma-dp2005-06.

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Length: 33 Pages
Date of creation: Jun 2005
Date of revision:
Handle: RePEc:rdg:icmadp:icma-dp2005-06

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Related research

Keywords: credit rating; spread implied rating; credit risk;

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Cited by:
  1. Ansgar Belke & Christian Gokus, 2011. "Volatility Patterns of CDS, Bond and Stock Markets Before and During the Financial Crisis – Evidence from Major Financial Institutions," Ruhr Economic Papers 0243, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.

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