On the Consistency of Ratings and Bond Market Yields
32 Pages Posted: 25 Mar 2002
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
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