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How consistent are credit ratings? a geographic and sectoral analysis of default risk

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Abstract

We examine differences in default rates by sector and obligor domicile. We find evidence that credit ratings have been imperfectly calibrated across issuer sectors in the past. Controlling for year of issue and rating, default rates appear to be higher for U.S. financial firms than for U.S. industrial firms. Sectoral differences in recovery rates do not offset the higher default rates. By contrast, we do not find significant differences in default rates between U.S. and foreign firms.

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  • John Ammer & Frank Packer, 2000. "How consistent are credit ratings? a geographic and sectoral analysis of default risk," International Finance Discussion Papers 668, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:668
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    1. Donald P. Morgan, 1998. "Judging the risk of banks: what makes banks opaque?," Research Paper 9805, Federal Reserve Bank of New York.
    2. Richard Cantor & Frank Packer, 1994. "The credit rating industry," Quarterly Review, Federal Reserve Bank of New York, vol. 19(Sum), pages 1-26.
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    1. Dähler, Timo, 2020. "Bias or ignorance? The politics and economics behind sovereign credit ratings," MPRA Paper 103965, University Library of Munich, Germany.
    2. De Fiore, Fiorella & Uhlig, Harald, 2005. "Bank finance versus bond finance: what explains the differences between US and Europe?," Working Paper Series 547, European Central Bank.
    3. Guttler, Andre & Wahrenburg, Mark, 2007. "The adjustment of credit ratings in advance of defaults," Journal of Banking & Finance, Elsevier, vol. 31(3), pages 751-767, March.
    4. Dirk Czarnitzki & Kornelius Kraft, 2007. "Are credit ratings valuable information?," Applied Financial Economics, Taylor & Francis Journals, vol. 17(13), pages 1061-1070.
    5. Tabak, Benjamin M. & Luduvice, André Victor D. & Cajueiro, Daniel O., 2011. "Modeling default probabilities: The case of Brazil," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(4), pages 513-534, October.
    6. Philippe Jorion & Charles Shi & Sanjian Zhang, 2009. "Tightening credit standards: the role of accounting quality," Review of Accounting Studies, Springer, vol. 14(1), pages 123-160, March.
    7. Darrell Duffie & Robert Jarrow & Amiyatosh Purnanandam & Wei Yang, 2008. "Market Pricing of Deposit Insurance," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 22, pages 551-577, World Scientific Publishing Co. Pte. Ltd..
    8. Zhao, Sheng & Moreira, Fernando & Wang, Tong, 2021. "Is solicitation status related to rating conservatism and rating quality?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 72(C).
    9. Shen, Chung-Hua & Huang, Yu-Li & Hasan, Iftekhar, 2012. "Asymmetric benchmarking in bank credit rating," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(1), pages 171-193.
    10. Altdörfer, Marc & de las Salas Vega, Carlos A. & Guettler, Andre & Löffler, Gunter, 2016. "European versus Anglo-Saxon credit view: Evidence from the eurozone sovereign debt crisis," IWH Discussion Papers 34/2016, Halle Institute for Economic Research (IWH).
    11. Chen, Zhongfei & Matousek, Roman & Stewart, Chris & Webb, Rob, 2019. "Do rating agencies exhibit herding behaviour? Evidence from sovereign ratings," International Review of Financial Analysis, Elsevier, vol. 64(C), pages 57-70.
    12. Manzoni, Katiuscia, 2004. "Modeling Eurobond credit ratings and forecasting downgrade probability," International Review of Financial Analysis, Elsevier, vol. 13(3), pages 277-300.
    13. Mr. Ashok Vir Bhatia, 2002. "Sovereign Credit Ratings Methodology: An Evaluation," IMF Working Papers 2002/170, International Monetary Fund.
    14. Mark Carey & Greg Nini, 2007. "Is the Corporate Loan Market Globally Integrated? A Pricing Puzzle," Journal of Finance, American Finance Association, vol. 62(6), pages 2969-3007, December.

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