The Technology of Ratings Then and Now; Hiding in Plain Sight

26 Pages Posted: 21 Jan 2016

See all articles by Berry K. Wilson

Berry K. Wilson

Pace University - Department of Finance and Economics

John Donnellan

New Jersey City University

Date Written: January 2016

Abstract

The subprime crisis seriously undermined the credibility of the rating agencies and their approach to analyzing credit risk. Along with other identified problems with bond ratings, this study investigates the issue that the technology used by the ratings agencies is at best dated and little changed since John Moody published his first bond ratings in 1909. The study compares the predictive accuracy of Moody's bond ratings with the structural modeling approach of Vassalou and Xing (2004), using railroad data from the Great Depression. Study results show that the structural modeling approach outperforms the expert judgment incorporated in Moody's bond ratings from that period.

Keywords: bond ratings, Moody's, structural model, default analysis

JEL Classification: N2, G2

Suggested Citation

Wilson, Berry K. and Donnellan, John, The Technology of Ratings Then and Now; Hiding in Plain Sight (January 2016). Financial Markets, Institutions & Instruments, Vol. 25, Issue 1, pp. 49-74, 2016. Available at SSRN: https://ssrn.com/abstract=2719297 or http://dx.doi.org/10.1111/fmii.12035

Berry K. Wilson (Contact Author)

Pace University - Department of Finance and Economics ( email )

Lubin School of Business
New York, NY 10038
United States

John Donnellan

New Jersey City University

2039 Kennedy Boulevard
Jersey City, NJ 07305-1597
United States

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