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Timeliness of Spread Implied Ratings

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  • Jianming Kou
  • Simone Varotto

Abstract

Rating agencies are known to be prudent in their approach to rating revisions, which results in delayed rating adjustments. For a large set of eurobonds we derive credit spread implied ratings and compare them with agency ratings. Our results indicate that spread implied ratings often anticipate the future movement of agency ratings and hence can 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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  • Jianming Kou & Simone Varotto, 2008. "Timeliness of Spread Implied Ratings," European Financial Management, European Financial Management Association, vol. 14(3), pages 503-527, June.
    • Handle: RePEc:bla:eufman:v:14:y:2008:i:3:p:503-527
    DOI: 10.1111/j.1468-036X.2007.00362.x
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    1. Serafeim Tsoukas & Marina-Eliza Spaliara, 2014. "Market Implied Ratings and Financing Constraints: Evidence from US Firms," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(1-2), pages 242-269, January.
    2. Rosella Castellano & Luisa Scaccia, 2014. "Can CDS indexes signal future turmoils in the stock market? A Markov switching perspective," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 22(2), pages 285-305, June.
    3. Makram El‐Shagi & Gregor von Schweinitz, 2022. "Why they keep missing: An empirical investigation of sovereign bond ratings and their timing," Scottish Journal of Political Economy, Scottish Economic Society, vol. 69(2), pages 186-224, May.
    4. Leonardo Becchetti & Andrea Carpentieri & Iftekhar Hasan, 2012. "Option†Adjusted Delta Credit Spreads: a Cross†Country Analysis," European Financial Management, European Financial Management Association, vol. 18(2), pages 183-217, March.
    5. Michael J. Brennan & Julia Hein & Ser†Huang Poon, 2009. "Tranching and Rating," European Financial Management, European Financial Management Association, vol. 15(5), pages 891-922, November.
    6. Simone Varotto, 2011. "Liquidity risk, credit risk, market risk and bank capital," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 7(2), pages 134-152, April.
    7. Mascia Bedendo & Lara Cathcart & Lina El†Jahel, 2011. "Market and Model Credit Default Swap Spreads: Mind the Gap!," European Financial Management, European Financial Management Association, vol. 17(4), pages 655-678, September.

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