Using a bootstrap approach to rate the raters

This paper compares the accuracy of credit ratings of Moody s and Standard&Poors. Based on 11,428 issuer ratings and 350 defaults in several datasets from 1999 to 2003 a slight advantage for the rating system of Moody s is detected. Compared to former research the robustness of the results is increased by using nonparametric bootstrap approaches. Furthermore, robustness checks are made to control for the impact of Watchlist entries, staleness of ratings and the effect of unsolicited ratings on the results

Does the stock market react to unsolicited ratings?

This paper investigates whether the stock market reacts to unsolicited ratings for a sample of S&P rated firms from January 1996 to December 2005. We first analyze the stock market reaction associated with the assignment of an initial unsolicited rating. We find evidence that this reaction is negative and particularly accentuated for Japanese firms. A comparison between S&P’s initial unsolicited ratings with previously published ratings of two Japanese rating agencies for a Japanese subsample shows that ratings assigned by S&P are systematically worse. Further, we find that the stock market does not react to the transition from an unsolicited to a solicited rating. Comparison of the upgrades in the sample with a matched-sample of upgrades of solicited ratings reveals that the price reactions are no different. In addition, abnormal returns are worse for firms whose rating remained unchanged after the solicitation compared to those for upgraded firms. Finally, we find that Japanese firms are less likely to receive an upgrade. Our findings suggest that unsolicited ratings are biased downwards, that the capital market therefore expects upgrades of formerly unsolicited ratings and punishes firms whose ratings remain unchanged. All these effects seem to be more pronounced for Japanese firms

The adjustment of credit ratings of defaulted issuers

We provide insights into determinants of the rating level of 371 issuers which defaulted in the years 1999 to 2003, and into the leader-follower relationship between Moody’s and S&P. The evidence for the rating level suggests that Moody’s assigns lower ratings than S&P for all observed periods before the default event. Furthermore, we observe two-way Granger causal-ity, which signifies information flow between the two rating agencies. Since lagged rating changes influence the magnitude of the agencies’ own rating changes it would appear that the two rating agencies apply a policy of taking a severe downgrade through several mild down-grades. Further, our analysis of rating changes shows that issuers with headquarters in the US are less sharply downgraded than non-US issuers. For rating changes by Moody’s we also find that larger issuers seem to be downgraded less severely than smaller issuers

Comparing the accuracy of default predictions in the rating industry: The case of Moody's vs. S&P

We consider 1927 borrowers from 54 countries who had a credit rating by both Moodys and S&P as of the end of 1998, and their subsequent default history up to the end of 2002. Viewing bond ratings as predicted probabilities of default, we show that it is unlikely that both agencies are well calibrated, and that the ranking of the agencies depends crucially on the way in which probability predictions are compared. --credit rating,probability forecasts,calibration

The impact of downward rating momentum on credit portfolio risk

Rating downgrades are known to make subsequent downgrades more likely. We analyze the impact of this ?downward momentum? on credit portfolio risk. Using S&P ratings from 1996 to 2005, we estimate a transition matrix that is insensitive to and a second matrix that is sensitive to previous downgrades. We then derive differences between the insensitive portfolio Value-at-Risk (VaR) and the momentum-sensitive VaR. We find realistic scenarios where investors who rely on insensitive transition matrices underestimate the VaR by eight percent of the correct value. The result is relevant for risk managers and regulators since banks neglecting the downward rating momentum might hold insufficient capital. -- In der Analyse von Ratingänderungen spricht man von einem Ratingimpuls (rating momentum), wenn die Wahrscheinlichkeit zukünftiger Ratingänderungen und Ausfälle nicht nur vom aktuellen Rating, sondern auch von früheren Ratingänderungen abhängt. Für Herabstufungen ist ein Ratingimpuls vielfach empirisch belegt: Innerhalb einer Ratingklasse haben die Anleihen mit vorangegangenen Herabstufungen eine höhere Ausfallwahrscheinlichkeit und eine höhere Wahrscheinlichkeit, herabgestuft zu werden, als solche ohne vorangegangene Herabstufungen. Dieser Ratingimpuls hat einen Einfluss auf das Wertänderungsrisiko eines Anleihenportfolios: Vergleicht man zwei Portfolios mit gleicher Ratingzusammensetzung, von denen das erste einen hohen Anteil zuvor herabgestufter Anleihen hat und das zweite einen geringen, dann sind im ersten Portfolio mehr Ausfälle und Barwertverluste durch die Neubewertung nach Herabstufungen zu erwarten als im zweiten. Wir messen den Einfluss des Ratingimpulses auf das Kreditportfoliorisiko unter möglichst realistischen Annahmen. Mit Standard-and-Poor?s-Daten von 1996 bis 2005 schätzen wir zunächst eine Ratingmigrationsmatrix, die den Ratingimpuls berücksichtigt, und eine Matrix, die den Impuls ignoriert. Anschließend verwenden wir die Matrizen in einem Kreditportfoliomodell vom Typ CreditMetrics und berechnen Unterschiede zwischen dem Value-at-Risk (VaR) mit und ohne Berücksichtigung des Ratingimpulses, wobei wir ersteren als richtig ansehen. Wir nehmen dabei an, dass der Portfoliomanager das aktuelle Rating, aber nicht den Ratingimpuls beachtet, also rein zufällig einige zuvor herabgestufte Anleihen ausgewählt hat. Wir gewinnen damit ein Risikomaß für die Fehleinschätzung des VaR. Es zeigt sich, dass ohne Berücksichtigung des Ratingimpulses der VaR von 6,7 % den korrekten VaR mit Ratingimpuls im Mittel um 0,24 % des Portfoliovolumens (3,5 % des richtigen VaR) unterschätzt. Bedeutsamer sind aber die erheblichen Schwankungen: Unter normalen Bedingungen gibt es eine Wahrscheinlichkeit von 5 %, dass der VaR ohne Ratingimpuls den korrekten VaR um mehr als 0,59 % (8,1 % des richtigen VaR) unterschätzt; in einer ökonomischen Stress-Situation kann der Fehler leicht 1,8 % (6.8 % des richtigen VaR) betragen. Das Ergebnis ist relevant für Risikomanager und Bankenaufseher, denn Banken, die den Ratingimpuls vernachlässigen, halten möglicherweise nicht ausreichend Kapital vor.Rating drift,Downward momentum,Credit portfolio risk,Value-at-Risk

On Comparing the Accuracy of Default Predictions in the Rating Industry

We consider 1927 borrowers from 54 countries who had a credit rating by both Moody's and S&P at the end of 1998, and their subsequent default history up to the end of 2002. Viewing bond ratings as predicted probabilities of default, we consider partial orderings among competing probability forecasters and show that Moody's and S&P cannot be ordered according to any of these. Therefore, the relative performance of the agencies depends crucially on the way in which probability predictions are compared.credit rating, probability forecasts, calibration

Hidden gems and borrowers with dirty little secrets: investment in soft information, borrower self-selection and competition

This paper empirically examines the role of soft information in the competitive interaction between relationship and transaction banks. Soft information can be interpreted as a private signal about the quality of a firm that is observable to a relationship bank, but not to a transaction bank. We show that borrowers self-select to relationship banks depending on whether their privately observed soft information is positive or negative. Competition affects the investment in learning the private signal from firms by relationship banks and transaction banks asymmetrically. Relationship banks invest more; transaction banks invest less in soft information, exacerbating the selection effect. Finally, we show that firms where soft information was important in the lending decision were no more likely to default compared to firms where only financial information was used

Low-velocity collisions of centimeter-sized dust aggregates

Collisions between centimeter- to decimeter-sized dusty bodies are important to understand the mechanisms leading to the formation of planetesimals. We thus performed laboratory experiments to study the collisional behavior of dust aggregates in this size range at velocities below and around the fragmentation threshold. We developed two independent experimental setups with the same goal to study the effects of bouncing, fragmentation, and mass transfer in free particle-particle collisions. The first setup is an evacuated drop tower with a free-fall height of 1.5 m, providing us with 0.56 s of microgravity time so that we observed collisions with velocities between 8 mm/s and 2 m/s. The second setup is designed to study the effect of partial fragmentation (when only one of the two aggregates is destroyed) and mass transfer in more detail. It allows for the measurement of the accretion efficiency as the samples are safely recovered after the encounter. Our results are that for very low velocities we found bouncing as could be expected while the fragmentation velocity of 20 cm/s was significantly lower than expected. We present the critical energy for disruptive collisions Q*, which showed up to be at least two orders of magnitude lower than previous experiments in the literature. In the wide range between bouncing and disruptive collisions, only one of the samples fragmented in the encounter while the other gained mass. The accretion efficiency in the order of a few percent of the particle's mass is depending on the impact velocity and the sample porosity. Our results will have consequences for dust evolution models in protoplanetary disks as well as for the strength of large, porous planetesimal bodies

Are ad-hoc disclosure rules correctly put into action? An empirical analysis including firms of the German Neuer Markt.

Im Rahmen einer Ereignisstudie am deutschen Kapitalmarkt wird untersucht, ob Adhoc- Mitteilungen korrekt eingesetzt werden. Die Ergebnisse belegen, daß Nemax-50-Unternehmen die Veröffentlichung potentiell positiver Meldungsinhalte bevorzugen und die Bekanntmachung negativer Mitteilungen verzögern. Außerdem veröffentlichen Nemax-50-Werte in positiven Marktphasen besonders viele Mitteilungen und einen besonders hohen Anteil an positiven Meldungsinhalten, um von der positiven Stimmung der Marktteilnehmer zu profitieren. Dax-30-Werte verhalten sich dagegen regelgerecht. Die Befunde belegen die Notwendigkeit einer stärkeren Überwachung des Veröffentlichungsverhaltens der Emittenten, die in 2002 am Neuen Markt gelistet waren.In this paper stock price reactions of reports based on ad-hoc-disclosure rules (section 15 of the German securities law) are examined. This event study includes for the first time reports filed by companies of the Neuer Markt, which was the German market for fast growing and inventive firms. The investigation concentrates on the reproach that investors are swampt over with reports, which are abused for investor relation purposes instead informing about issues according to the regulations. For a sample of 80 German firms containing blue chips of the Dax-30 and growth stocks of the Nemax-50, the evidence indicates that only firms of the Nemax-50 prefer publishing potentially good news, delaying bad news and publishing even more good news in positive market conditions. The results show the necessity for stricter control of existing ad-hoc disclosure rules to regain investors trust in equity markets