Credit ratings and credit risk

Jens Hilscher and Mungo Wilson ()
Additional contact information
Mungo Wilson: University of Oxford

No 31, Working Papers from Brandeis University, Department of Economics and International Business School

Abstract: This paper investigates the information in corporate credit ratings. We examine the extent to which firms' credit ratings measure raw probability of default as opposed to systematic risk of default, a firm's tendency to default in bad times. We find that credit ratings are dominated as predictors of corporate failure by a simple model based on publicly available financial information (`failure score'), indicating that ratings are poor measures of raw default probability. However, ratings are strongly related to a straightforward measure of systematic default risk: the sensitivity of firm default probability to its common component (`failure beta'). Furthermore, this systematic risk measure is strongly related to credit default swap risk premia. Our findings can explain otherwise puzzling qualities of ratings.

Keywords: Credit Rating; Credit Risk; Default Probability; Forecast Accuracy; Systematic Default Risk (search for similar items in EconPapers)
JEL-codes: G12 G24 G33 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2011-06
New Economics Papers: this item is included in nep-ban, nep-bec, nep-cfn and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://www.brandeis.edu/economics/RePEc/brd/doc/Brandeis_WP31.pdf First version, 2011 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:brd:wpaper:31

Access Statistics for this paper

More papers in Working Papers from Brandeis University, Department of Economics and International Business School Contact information at EDIRC.
Bibliographic data for series maintained by Andrea Luna ().