Reliability and Agreement of Credit Ratings in the Mexican Fixed Income Market

22 Pages Posted: 30 Nov 2015

See all articles by Ventura Charlin

Ventura Charlin

V. C. Consultants; EVENTUS ANALYTICS

Arturo Cifuentes

Finance & Economics Division, Columbia University

Multiple version iconThere are 2 versions of this paper

Date Written: November 29, 2015

Abstract

Credit ratings play an important role in the fixed income market as the entire regulatory framework of this market segment is based on them and a significant part of what investors can and cannot do is dictated by ratings. Also, a number of ratings-based metrics are employed globally to estimate capital reserves, liquidity buffers, and solvency standards for many institutional investors such as insurance companies and pension funds. A critical assumption at the root of this regulatory architecture is that the credit-rating scales of the three leading agencies (Moody’s, Fitch, and Standard & Poor’s) are completely equivalent.

In this study we focus on the Mexican fixed income market. We find that the ratings of all three rating agencies exhibit a very high degree of inter-rater reliability. This means that in terms of ranking a group of bonds based on creditworthiness the three rating agencies would produce very similar results.

On the other hand, using a non-parametric statistic, the Wilcoxon matched-pairs test, we conclude that there are significant discrepancies among the ratings of the three agencies. This is consistent with a low level of inter-rater agreement detected. These findings challenge the suitability of credit ratings as a useful metric for regulatory purposes as they create the possibility of arbitrage.

Keywords: credit ratings; rating agencies; bond markets; financial regulation

JEL Classification: G24, G15, F3

Suggested Citation

Charlin, Ventura and Cifuentes, Arturo, Reliability and Agreement of Credit Ratings in the Mexican Fixed Income Market (November 29, 2015). Available at SSRN: https://ssrn.com/abstract=2696621 or http://dx.doi.org/10.2139/ssrn.2696621

Ventura Charlin (Contact Author)

V. C. Consultants ( email )

Avda. Los Leones 1300
Suite 1202
Santiago, RM 7510477
Chile
227897447 (Phone)

EVENTUS ANALYTICS ( email )

230 E 73rd Street
New York, NY New York 10021
United States

Arturo Cifuentes

Finance & Economics Division, Columbia University ( email )

Columbia University, Finance & Economics
URIS HALL
NEW YORK, NY
United States

HOME PAGE: http://www8.gsb.columbia.edu/cbs-directory/detail/ac4170

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