Timeliness of Spread Implied Ratings

25 Pages Posted: 13 May 2008

See all articles by Jianming Kou

Jianming Kou

University of Reading - ICMA Centre

Simone Varotto

ICMA Centre - Henley Business School, University of Reading

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Abstract

Rating agencies are known to be prudent in their approach to rating revisions, which results in delayed rating adjustments. For a large set of eurobonds we derive credit spread implied ratings and compare them with agency ratings. Our results indicate that spread implied ratings often anticipate the future movement of agency ratings and hence can help track credit risk in a more timely manner. This finding has important implications for risk managers in banks who, under the new Basel 2 regulations, have to rely more on credit ratings for capital allocation purposes, and for portfolio managers who face rating-related investment restrictions.

Suggested Citation

Kou, Jianming and Varotto, Simone, Timeliness of Spread Implied Ratings. European Financial Management, Vol. 14, Issue 3, pp. 503-527, June 2008. Available at SSRN: https://ssrn.com/abstract=1132531 or http://dx.doi.org/10.1111/j.1468-036X.2007.00362.x

Jianming Kou

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

Simone Varotto

ICMA Centre - Henley Business School, University of Reading ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

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