Predicting Agency Rating Movements with Spread Implied Ratings

by Jianming Kou of the University of Reading, and
Simone Varotto of the University of Reading

December 22, 2004

Abstract: Investors in the credit market traditionally rely on credit ratings produced by rating agencies to determine the creditworthiness of debt issues. A major drawback of these agency-produced ratings is the lack of timeliness. In this work we derive the yield spread implied ratings for a large dataset of Eurobonds, taking into account the term structure effect and the time-varying spread level. We then compare the behaviour pattern of the spread implied rating and that of the agency rating. Our statistics suggest that spread implied ratings could be used to predict the future movement of agency ratings.

Published in: European Financial Management, Vol. 14, No. 3, (June 2008), pp. 503-527.

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