|
Archive@NYU >
Stern School of Business >
Finance Working Papers >
Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26557
|
| Title: | How rating Agenices achieve rating stability |
| Authors: | Altman, Edward I.
Rijken, Herbert A. |
| Issue Date: | Apr-2004 |
| Series/Report no.: | FIN-04-031 |
| Abstract: | Surveys on the use of agency credit ratings reveal that some investors
believe that rating agencies are relatively slow in adjusting their
ratings. A well-accepted explanation for this perception on the
timeliness of ratings is the "through-the-cycle" methodology
that agencies use. According to Moody's, through-the-cycle ratings are
stable because they are intended to measure the risk of default risk
over long investment horizons, and because they are changed only when
agencies are confident that observed changes in a company's risk profile
are likely to be permanent. To verify this explanation, we quantify the
impact of the long-term default horizon and the prudent migration policy
on rating stability from the perspective of an investor - with no desire
for rating stability. This is done by benchmarking agency ratings with a
financial ratio-based (credit scoring) agency-rating prediction model
and (credit scoring) default-prediction models of various time horizons.
We also examine rating migration practices. Final result is a better
quantitative understanding of the through-the-cycle methodology. By
varying the time horizon in the estimation of default-prediction models,
we search for a best match with the agency-rating prediction model.
Consistent with the agencies' stated objectives, we conclude that agency
ratings are focused on the long term. In contrast to one-year default
prediction models, agency ratings place less weight on short-term
indicators of credit quality. We also demonstrate that the focus of
agencies on long investment horizons explains only part of the relative
stability of agency ratings. The other aspect of through-the-cycle
rating methodology - agency rating-migration policy - is an even more
important factor underlying the stability of agency ratings. We find
that rating migrations are triggered when the difference between the
actual agency rating and the model predicted rating exceeds a certain
threshold level. When rating migrations are triggered, agencies adjust
their ratings only partially, consistent with the known serial
dependency of agency rating migrations. |
| URI: | http://hdl.handle.net/2451/26557 |
| Appears in Collections: | Finance Working Papers
|
All items in Faculty Digital Archive are protected by copyright, with all rights reserved.
|
