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Credit Ratings Across Asset Classes: A Long-Term Perspective

Author

Listed:
  • Jess N. Cornaggia
  • Kimberly J. Cornaggia
  • John E. Hund

Abstract

We test whether ratings are comparable across asset classes. We examine default rates by initial rating, accuracy ratios, migration metrics, instantaneous upgrade and downgrade intensities, and rating changes over bonds’ lives in multivariate regressions. These approaches reveal substantial and persistent differences across broad asset classes, as well as across subcategories of structured finance products. Our results are best explained by variation in rating agency incentives and variation in underlying risk profiles. We conclude that regulations requiring ratings to perform comparably across asset classes will prove difficult to enforce. We advocate instead a regulatory framework that better distinguishes risks and incentives across asset classes.

Suggested Citation

  • Jess N. Cornaggia & Kimberly J. Cornaggia & John E. Hund, 2017. "Credit Ratings Across Asset Classes: A Long-Term Perspective," Review of Finance, European Finance Association, vol. 21(2), pages 465-509.
  • Handle: RePEc:oup:revfin:v:21:y:2017:i:2:p:465-509.
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    File URL: http://hdl.handle.net/10.1093/rof/rfx002
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    References listed on IDEAS

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Free Riding in Finance: A Primer
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2017-12-18 18:59:37

    Citations

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    Cited by:

    1. Vu Tran & Rasha Alsakka & Owain ap Gwilym, 2018. "Multiple credit ratings and market heterogeneity," Working Papers 2018-26, Swansea University, School of Management.
    2. repec:eee:jfinec:v:125:y:2017:i:3:p:454-474 is not listed on IDEAS
    3. repec:eee:pacfin:v:47:y:2018:i:c:p:39-59 is not listed on IDEAS

    More about this item

    Keywords

    Credit ratings; Credit standard; Rating agency; Ratings comparability; Regulatory capital;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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