Researchers Find Rating Agencies Overrated

May 7, 2012 by · Leave a Comment
Filed under: The Rating Agencies 

Credit Business Management reports that a paper written by Dr. Mungo Wilson, Saïd Business School, University of Oxford, and Jens Hilscher, Brandeis University, asserts that credit rating agencies’ ability to predict default is overrated.

Dr. Wilson said, “Our research proves what many critics of credit rating agencies have been arguing for years — that the accuracy and informational value of corporate credit ratings is dishearteningly low. Ratings are not an optimal predictor of default probability. They explain little of the variation in default probability across firms and they fail to capture the considerable variation in default probabilities and empirical failure rate over the business cycle.”

The two researchers conclude that it would be more accurate and useful to separate default prediction from the measurement of systematic risk.

Default prediction data could be updated frequently and rapidly to respond to firm-specific news, while measures of systemic risk could be a combination of current credit ratings and aggregate credit conditions.

The full paper is available at: http://people.brandeis.edu/~hilscher/CreditRatings_HilscherWilson_Jan2012.pdf

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