On the information content of credit ratings and market-based measures of default risk

Oleg R. Gredil, Nishad Kapadia and Jung Hoon Lee

Journal of Financial Economics, 2022, vol. 146, issue 1, 172-204

Abstract: We examine the ability of ratings and market-based measures to predict defaults. Although market-based measures are more accurate at horizons up to one year, ratings complement market-based measures and are not redundant in predicting defaults across horizons. Market-based measures differ from ratings in that they respond to both cash-flow and discount-rate news, while ratings respond primarily to cash-flow news, which is more informative of future defaults. Ratings ignore transitory shocks to credit risk, while market-based measures do not. Rating agencies respond to transitory shocks with watches rather than downgrades. Ratings are more informative during expansions and for speculative grade firms.

Keywords: Credit ratings; Credit Default Swaps; Default probability; Term strucutre of default risk (search for similar items in EconPapers)
JEL-codes: G14 G24 G32 G33 G38 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:146:y:2022:i:1:p:172-204

DOI: 10.1016/j.jfineco.2022.07.005

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