Do Credit Ratings Move Toward the Market, or Vice Versa?

Posted: 27 Oct 2018

See all articles by Colin Ellis

Colin Ellis

Hult International Business School (London)

Kumar Kanthan

Moody's Investors Service

Veronica Zheng

Moody's Investors Service

Date Written: October 1, 2018

Abstract

There are many different gauges of credit risk that investors can use to inform their decisions. Credit rating agencies have produced measures of credit risk for many decades, but financial markets also offer a guide to these risks. The authors examine the behavior of ratings relative to market signals on credit risk. In particular, the authors examine what happens when ratings and market signals differ, in terms of any subsequent convergence (or not). They find that, on average, market signals move more frequently toward ratings than vice versa. In terms of the magnitude of these movements, however, the picture is less clear. When market signals suggest lower credit risk than ratings do, they tend to close more of the gap; when ratings are higher than market signals, however, sometimes ratings close the gap more.

Keywords: Credit Risk, Credit Ratings, Market Signals

JEL Classification: G24, G12

Suggested Citation

Ellis, Colin and Kanthan, Kumar and Zheng, Veronica, Do Credit Ratings Move Toward the Market, or Vice Versa? (October 1, 2018). Journal of Fixed Income, Vol. 28, No. 2, 2018, Available at SSRN: https://ssrn.com/abstract=3259892

Colin Ellis (Contact Author)

Hult International Business School (London) ( email )

35 Commercial Road
London, E1 1LD
United Kingdom

Kumar Kanthan

Moody's Investors Service ( email )

99 Church Street
New York, NY 10007
United States

Veronica Zheng

Moody's Investors Service ( email )

99 Church Street
New York, NY 10007
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
473
PlumX Metrics