We use a unique dataset of bond downgrades from a niche rating company that has been found to be reacting faster to publicly available information than its competitors. Using regime-switching models we propose risk measures to quantify stock return disturbances (distress costs) associated with...

This paper shows that the stock price of the rating agency Moody’s reacts negatively to ratingactions that are perceived to indicate low rating quality. The reaction is economicallysignificant. The cumulative effect corresponds to a 20% loss in market capitalization. Thissuggests that market...

Rating agencies state that they take a rating action only when it is unlikely to bereversed shortly afterwards. Using a formal representation of the rating process, I showthat such a policy provides a good explanation for the empirical evidence: ratingchanges relatively seldom occur, they...

This paper assesses whether ratings or market-based credit risk measures are more suitable forformulating portfolio governance rules. Such rules, which consist of buy and sell restrictions,are commonly used in investment management. Based on data from 1983 to 2002, it is notevident that one of...

Using a structural model of default, I derive rating characteristics if ratings are meant tolook ‘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 aseparation of permanent and...

How do ratings fit in?, Financial crisis Issues, Financial Crisis Impact

Before - The use of ratings; During- Responses, Reactions, Lessons Learnt; After- BReakouts, Conclusions...

Rating agencies learned their lessons, insurance ratings less affected than other (banks, MBS), insurance ratings will remain an important part of financial markets...until a new black swan emerges...

This paper examines why unsolicited ratings tend to be lower than solicited ratings. Bothself-selection among issuers and strategic conservatism of rating agencies may be reasonableexplanations. Analyses of default incidences of non-U.S. borrowers between January 1996and December 2006 show that...

This paper examines the role of bond ratings and the effects of rating-based regulations in thecorporate bond market. Exploiting an unanticipated mechanical change in how the benchmarkLehman bond indices are constructed in 2005, we show that rating-induced market segmentationof the bond market...