A Point-in-Time Perspective on Through-the-Cycle Ratings

Edward I. Altman · Herbert A. Rijken

115 citations0/0 files storedFinancial Analysts Journal

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Abstract

The role and performance of credit-rating agencies are currently under debate. Several surveys conducted in the United States reveal that most investors believe rating agencies are too slow in adjusting their ratings to changes in corporate creditworthiness. It is well known that agencies achieve rating stability by their through-the-cycle methodology. This study provides quantitative insight into this methodology from an investor's point-in-time perspective and quantifies the effects of the methodology on three, somewhat conflicting, objectives: rating stability, rating timeliness, and performance in predicting defaults. The results can guide the search for an optimal balance among these three objectives.

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1968FINANCIAL RATIOS, DISCRIMINANT ANALYSIS AND THE PREDICTION OF CORPORATE BANKRUPTCY 2004How rating agencies achieve rating stability 2002Analyzing rating transitions and rating drift with continuous observations 2000Credit risk rating systems at large US banks 2003An anatomy of rating through the cycle 2001Moody’s investors service response to the consultative paper issued by the Basel Committee on Bank Supervision “A new capital adequacy framework”1992The Implications of Corporate Bond Ratings Drift

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