The Path to Impairment: Do Credit Rating Agencies Anticipate Default Events of Structured Finance Transactions?

European Journal of Finance 19(9), 2013, 841-860

29 Pages Posted: 6 Jun 2011 Last revised: 19 Nov 2015

See all articles by Matthias Bodenstedt

Matthias Bodenstedt

University of Cambridge - Judge Business School

Daniel Roesch

University of Regensburg

Harald (Harry) Scheule

University of Technology Sydney (UTS) - School of Finance and Economics; Financial Research Network

Date Written: September 16, 2011

Abstract

The Global Financial Crisis (GFC) has led to a general discussion of the accuracy and declining standards of credit rating agency ratings. Substantial criticism has been directed toward the securitisation market, which has been identified as one of the main sources of the crisis. This study focuses on the ability of rating agencies to adjust their ratings prior to impairments of structured finance transactions. We develop a new measure that quantifies a rating agency’s performance in advance of defaults. Analysing a large number of impaired transactions rated by Moody’s Investors Service, we find that rating quality deteriorated during the GFC. Furthermore, we identify tranchespecific and macroeconomic factors that explain differences in Moody’s performance.

Keywords: Anticipation Coefficient, Credit Rating Agencies, Rating Quality, Global Financial Crisis, Structured Finance Rating

JEL Classification: G01, G14, G24, G28

Suggested Citation

Bodenstedt, Matthias and Roesch, Daniel and Scheule, Harald, The Path to Impairment: Do Credit Rating Agencies Anticipate Default Events of Structured Finance Transactions? (September 16, 2011). European Journal of Finance 19(9), 2013, 841-860, Available at SSRN: https://ssrn.com/abstract=1858364

Matthias Bodenstedt (Contact Author)

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Daniel Roesch

University of Regensburg ( email )

Chair of Statistics and Risk Management
Faculty of Business, Economics and BIS
Regensburg, 93040
Germany

HOME PAGE: http://www-risk.ur.de/

Harald Scheule

University of Technology Sydney (UTS) - School of Finance and Economics ( email )

P.O. Box 123
Broadway, NSW 2007
Australia

HOME PAGE: http://https://www.uts.edu.au/staff/harald.scheule

Financial Research Network ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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