On the Consistency of Ratings and Bond Market Yields

Perraudin, William; Taylor, Alex P.

doi:10.2139/ssrn.302700

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On the Consistency of Ratings and Bond Market Yields

32 Pages Posted: 25 Mar 2002

See all articles by William Perraudin

William Perraudin

Imperial College London - Accounting, Finance, and Macroeconomics

Alex P. Taylor

Alliance Manchester Business School

Date Written: April 2003

Abstract

We study the consistency of the credit-risk orderings implicit in ratings and bond market yields. By analyzing errors in term structure estimates for bonds with particular ratings, we show that for significant periods, a quarter of some categories of high credit quality bonds are rated in a manner that is inconsistent with their pricing. Adjusting for economic determinants of spreads (tax, liquidity and risk premiums) and allowing for the dynamic adjustment of ratings and spreads largely eliminates the inconsistencies, however.

Keywords: Credit Spreads, Risky Debt Yields, Term Structure

Keywords: Credit Spreads, Risky Debt Yields, Term Structure

JEL Classification: C25, G21, G33

Suggested Citation: Suggested Citation

Perraudin, William and Taylor, Alex P., On the Consistency of Ratings and Bond Market Yields (April 2003). Available at SSRN: https://ssrn.com/abstract=302700 or http://dx.doi.org/10.2139/ssrn.302700