Credit Ratings across Asset Classes: A Long-Term Perspective

Review of Finance, Forthcoming

67 Pages Posted: 15 Aug 2011 Last revised: 4 Jan 2017

Jess Cornaggia

Pennsylvania State University - Department of Finance

Kimberly Rodgers Cornaggia

Pennsylvania State University - Department of Finance

John Hund

University of Georgia

Date Written: December 23, 2016

Abstract

We test whether ratings are comparable across asset classes over a 30-year sample. We examine default rates by initial rating, accuracy ratios, migration metrics, instantaneous upgrade and downgrade intensities, and rating changes over bonds’ entire lives in multivariate regressions. These approaches reveal substantial and persistent differences across broad asset class types, as well as across subcategories of structured finance products. Our results are best explained by variation in rating agency incentives and variation in underlying risk profiles across asset classes. We conclude that regulations requiring ratings to perform comparably across asset classes will prove difficult to enforce and we advocate instead a regulatory framework that better distinguishes risks and incentives across asset classes.

Keywords: Credit Ratings, Credit Standards, Rating Agency, Ratings Comparability, Regulatory Capital

JEL Classification: D82, D83, G14, G24, G28

Suggested Citation

Cornaggia, Jess and Cornaggia, Kimberly Rodgers and Hund, John, Credit Ratings across Asset Classes: A Long-Term Perspective (December 23, 2016). Review of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1909091 or http://dx.doi.org/10.2139/ssrn.1909091

Jess Cornaggia

Pennsylvania State University - Department of Finance ( email )

University Park, PA 16802
United States

HOME PAGE: http://jesscornaggia.com

Kimberly Rodgers Cornaggia (Contact Author)

Pennsylvania State University - Department of Finance ( email )

306 Business Bldg
University Park, PA 16802
United States
814-865-2243 (Phone)
814-865-3362 (Fax)

John Hund

University of Georgia ( email )

Athens, GA 30602
United States

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