An Examination of Rating Agencies' Actions Around the Investment-Grade Boundary

FRB of Kansas City Research Paper No. 03-01

35 Pages Posted: 25 Apr 2003

See all articles by Richard Johnson

Richard Johnson

Federal Reserve Bank of Kansas City - Economic Research Department

Date Written: February 2003

Abstract

Data on credit ratings by the agencies with the legal status of Nationally-Recognized Statistical Rating Organizations (NRSROs) show some tendency for one-day downgrades that start from the lowest investment grade, BBB-, to travel more grades than those from neighboring grades. This would be consistent with the lower threshold of the NRSROs; grade BBB- being at a substantial default probability, but also could occur simply because downgrades to junk severely impair some firms' operations. A comparison of data from a non-NRSRO agency and an NRSRO shows that the latter's regrades from BBB- moved in the direction of the non-NRSRO's earlier ratings. This suggests the non-NRSRO defines its grade BBB- more narrowly than the NRSRO.

Keywords: Credit Rankings, Default, Egan-Jones Ratings, Prediction, Enron, California Utilities

JEL Classification: G2, G28, G14

Suggested Citation

Johnson, Richard, An Examination of Rating Agencies' Actions Around the Investment-Grade Boundary (February 2003). FRB of Kansas City Research Paper No. 03-01. Available at SSRN: https://ssrn.com/abstract=394800 or http://dx.doi.org/10.2139/ssrn.394800

Richard Johnson (Contact Author)

Federal Reserve Bank of Kansas City - Economic Research Department ( email )

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