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

26 Pages Posted: 6 Sep 2017

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: September 4, 2017

Abstract

Credit ratings play an important role in the bond market, as the regulatory framework of this sector is based on ratings. A critical assumption is that the ratings of all the rating agencies are equivalent, ie, they exhibit very close agreement. This paper, borrowing concepts from measurement, test and psychometric theories, explores this issue in the Mexican corporate bond market. The ratings of all three credit rating agencies (CRAs) show a high degree of inter-rater reliability (similar ordinal relationships implied by the ratings); they only exhibit a mild level of inter-rater agreement (the degree to which two CRAs give the same rating), and they reveal significant discrepancy in ranking in paired observations. In summary, the three CRAs give ratings that are not equivalent, as their respective distributions are dissimilar. Therefore, our results challenge the suitability of ratings as a useful metric for regulatory purposes, as they create the possibility of arbitrage (rating shopping).

Keywords: credit ratings, Mexican bond market, financial regulation, split ratings, rating shopping

Suggested Citation

Charlin, Ventura and Cifuentes, Arturo, Reliability and Agreement of Credit Ratings in the Mexican Fixed-Income Market (September 4, 2017). Journal of Credit Risk, Vol. 13, No. 3, 2017. Available at SSRN: https://ssrn.com/abstract=3031857

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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