Abstract

http://ssrn.com/abstract=1474863
 
 

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Credit Ratings and Credit Risk: Is One Measure Enough?


Jens Hilscher


Brandeis University - International Business School

Mungo Ivor Wilson


University of Oxford - Said Business School

March 7, 2013

AFA 2013 San Diego Meetings Paper

Abstract:     
This paper investigates the information in corporate credit ratings from a positive and normative perspective. If ratings are to be informative indicators of credit risk they must reflect what a risk-averse investor cares about: both raw default probability and systematic risk. We find that ratings are inaccurate measures of raw default probability - they are dominated as predictors of failure by a simple model based on publicly available financial information. However, ratings do contain relevant information since they are related to a measure of exposure to common (and undiversifiable) variation in default probability, exposure that is related to CDS risk premia. Given the multidimensional nature of credit risk, it is not possible for one measure to capture all the relevant information. In consequence, ratings may be prone to misinterpretation.

Number of Pages in PDF File: 53

Keywords: credit rating, credit risk, default probability, forecast accuracy, systematic default risk

JEL Classification: G12, G24, G33

working papers series





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Date posted: September 18, 2009 ; Last revised: March 8, 2013

Suggested Citation

Hilscher, Jens and Wilson, Mungo Ivor, Credit Ratings and Credit Risk: Is One Measure Enough? (March 7, 2013). AFA 2013 San Diego Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1474863 or http://dx.doi.org/10.2139/ssrn.1474863

Contact Information

Jens Hilscher (Contact Author)
Brandeis University - International Business School ( email )
Mailstop 32
Waltham, MA 02454-9110
United States
HOME PAGE: http://people.brandeis.edu/~hilscher/
Mungo Ivor Wilson
University of Oxford - Said Business School ( email )
Park End Street
Oxford, OX1 1HP
Great Britain
+44 (0) 1865 288914 (Phone)
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