Credit Ratings across Asset Classes: A Long-Term Perspective

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