This paper assesses the quality of agency ratings from the perspective of their users. Specifically, I examine whether ratings or an alternative measure of default risk, expected default frequencies (EDFs), are more suitable for formulating governance rules. Such rules, which consist of buy and...

Agency ratings and market-based measures of default risk are useful complements. Combining the two improves the prediction of defaults over the use of a single measure. While in-sample analysis suggests that one should give more weight to ratings as the horizon increases, or issuers become less...

This paper shows that the stock price of the rating agency Moody's reacts negatively to rating actions that are perceived to indicate low rating quality. The reaction is economically significant. The cumulative effect corresponds to a 20% loss in market capitalization. This suggests that market...

I apply standard time series models to US housing prices. Forecasts made in 2005 or earlier would have produced stress scenarios that are worse than the subsequent actual change in housing prices. The probability of these scenarios is in the range that financial institutions should consider in...

To resolve the IPO underpricing puzzle it is essential to analyze who knows what when during the issuing process. In Germany, broker-dealers make a market in IPOs during the subscription period. We examine these pre-issue prices and find that they are highly informative. They are closer to the...

Evaluating the quality of credit portfolio risk models is an important issue for both banks and regulators. Lopez and Saidenberg (2000) suggest cross-sectional resampling techniques in order to make efficient use of available data. We show that their proposal disregards cross-sectional...

Using an asset-based model of default, I derive rating characteristics if ratings are meant to look 'through the cycle' as opposed to being based on the borrowers' current condition. The through-the-cycle method, which is employed by most rating agencies, requires a separation of permanent and...

We propose a Bayesian methodology that enables banks to improve their credit scoring models by imposing prior information. As prior information, we use coefficients from credit scoring models estimated on other data sets. Through simulations, we explore the default prediction power of three...

This paper examines whether the stock price of the rating agency Moody’s reacts negatively to rating actions that could indicate low rating quality. The reaction to rating reversals, which Moody’s describes as particularly damaging to investors, is economically significant. It suggests that...

Rating agencies claim to look through the cycle when assigning corporate credit ratings, which entails that they are able to separate trend components of default risk from transitory ones. To test whether agencies possess this competence, I take market-based estimates of 1-year default...