Credit Ratings across Asset Classes: A ≡ A?
Indiana University Bloomington - Kelley School of Business
Kimberly Rodgers Cornaggia
American University - Kogod School of Business; Indiana University Bloomington - Department of Finance
Rice University - Jesse H. Jones School of Management
January 22, 2013
Credit ratings are not comparable across asset classes. Like-rated bonds from different classes have significantly different default rates, transition dynamics, and initial upgrade and downgrade probabilities over our entire sample period from 1980-2010. Structured products are overrated relative to corporate issues while municipal and sovereign bonds are underrated. Our results are not easily explained by asset opacity, and are more consistent with a conflict of interest explanation. Because financial regulators, certain investors, and the rating agencies themselves relied on ratings comparability, our results have important implications for regulatory capital requirements, financial market legislation, and fixed income portfolio management.
Number of Pages in PDF File: 45
Keywords: credit ratings, NRSROs, municipal bonds, sovereign bonds, CDOs, capital markets regulation
JEL Classification: G14, G24, G28, G32working papers series
Date posted: August 15, 2011 ; Last revised: February 26, 2013
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