Are Credit Ratings Trustworthy? Empirical Study on the Dependence of Corporate Defaults to Market Risk within Investment Grade and Speculative Grade Range
The use of credit ratings has been advocated by regulators in the US as well as in Europe. The creation of “Nationally Recognized Statistical Rating Organizations” statue strengthened the appearance of the triopoly of Moody's, Standard & Poor's and Fitch thus creating a de jure dominant position in the markets. The Basel Accords forced many investors to rely on those three agencies throughout the rules on net capital requirements and the “External Credit Assessment Institutions” statue to be nationally implemented. We discuss in this paper the gap between what credit ratings are i.e. subjective credit opinions, and how regulators use them as an accurate assessment of a probability of default of an issuer. We bring evidence that despite all the shortcomings that credit ratings encounter, they still exhibit high performances in ranking the creditworthiness of corporate issuers. If we test empirical corporate defaults against market risk, it appears that speculative grade corporate defaults are 1.5 to 25.9 times more dependent upon the market than investment grade corporate defaults. Otherwise, the strong correlation existing between defaults of speculative grade companies and market indices proves that even if credit fundamentals are correctly rated, companies will always stay exposed to market and systematic risk
Year of publication: |
2012
|
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Authors: | Destraz, Stéphane |
Other Persons: | Lahaye, Raphaël (contributor) |
Publisher: |
[2012]: [S.l.] : SSRN |
Subject: | Kreditwürdigkeit | Credit rating | Kreditrisiko | Credit risk | Insolvenz | Insolvency | Spekulation | Speculation | Schätzung | Estimation |
Saved in:
freely available
Extent: | 1 Online-Ressource (46 p) |
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Type of publication: | Book / Working Paper |
Language: | English |
Notes: | Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments May 12, 2012 erstellt |
Other identifiers: | 10.2139/ssrn.2056849 [DOI] |
Classification: | G00 - Financial Economics. General |
Source: | ECONIS - Online Catalogue of the ZBW |
Persistent link: https://www.econbiz.de/10013106623
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