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Credit Rating Score Analysis

Author

Listed:
  • Wolfgang Karl Härdle
  • Phoon Kok Fai
  • David Lee Kuo Chuen

Abstract

We analyse a sample of funds and other securities each assigned a total rating score by an unknown expert entity. The scores are based on a number of risk and complexity factors, each assigned a category (factor score) of Low, Medium, or High by the expert entity. A principal component analysis of the data reveals that based on the chosen risk factors alone we cannot identify a single underlying latent source of risk in the data. Conversely, the chosen complexity factors are clearly related to one or two underlying sources of complexity. For the sample we nd a clear positive relation between the rst principal component and the total expert score. An attempt to match the securities' expert score by linear projection of their individual factor scores yields a best case correlation between expert score and projection of 0.9952. However, the sum of squared di erences is, at 46.5552, still notable.

Suggested Citation

  • Wolfgang Karl Härdle & Phoon Kok Fai & David Lee Kuo Chuen, 2016. "Credit Rating Score Analysis," SFB 649 Discussion Papers SFB649DP2016-046, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    • Handle: RePEc:hum:wpaper:sfb649dp2016-046
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    More about this item

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • G00 - Financial Economics - - General - - - General
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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