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On Comparing the Accuracy of Default Predictions in the Rating Industry

  • André Güttler
  • Walter Kraemer

We consider 1927 borrowers from 54 countries who had a credit rating by both Moody's and S&P at the end of 1998, and their subsequent default history up to the end of 2002. Viewing bond ratings as predicted probabilities of default, we consider partial orderings among competing probability forecasters and show that Moody's and S&P cannot be ordered according to any of these. Therefore, the relative performance of the agencies depends crucially on the way in which probability predictions are compared.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2008/wp-cesifo-2008-01/cesifo1_wp2202.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2202.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2202
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  1. Moon, Choon-Geol & Stotsky, Janet G, 1993. "Testing the Differences between the Determinants of Moody's and Standard & Poor's Ratings: An Application of Smooth Simulated Maximum Likelihood Estimation," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(1), pages 51-69, Jan.-Marc.
  2. Walter Krämer, 2006. "Evaluating probability forecasts in terms of refinement and strictly proper scoring rules," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 25(3), pages 223-226.
  3. Diebold, Francis X & Mariano, Roberto S, 1995. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(3), pages 253-63, July.
  4. Krämer, Walter, 2002. "On the ordering of probability forecasts," Technical Reports 2002,50, Technische Universität Dortmund, Sonderforschungsbereich 475: Komplexitätsreduktion in multivariaten Datenstrukturen.
  5. Crouhy, Michel & Galai, Dan & Mark, Robert, 2001. "Prototype risk rating system," Journal of Banking & Finance, Elsevier, vol. 25(1), pages 47-95, January.
  6. Carey, Mark & Hrycay, Mark, 2001. "Parameterizing credit risk models with rating data," Journal of Banking & Finance, Elsevier, vol. 25(1), pages 197-270, January.
  7. Robert L. Winkler, 1994. "Evaluating Probabilities: Asymmetric Scoring Rules," Management Science, INFORMS, vol. 40(11), pages 1395-1405, November.
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