scholarly journals Dynamic Mapping of Probability of Default and Credit Ratings of Russian Banks

2020 ◽  
Vol 14 (4) ◽  
pp. 31-46
Author(s):  
Ella Khromova
Keyword(s):  
Credit Risk ◽  
Credit Rating ◽  
Credit Ratings ◽  
Quantitative Measure ◽  
Optimal Time ◽  
Investment Horizon ◽  
Investment Strategies ◽  
Probability Of Default ◽  
Rating Agencies ◽  
Dynamic Mapping

Investors are interested in a quantitative measure of banks’ credit risk. This paper maps the credit ratings of Russian banks to default probabilities for different time horizons by constructing an empirical dynamic calibration scale. As such, we construct a dynamic scale of credit risk calibration to the probability of default (PD).Our study is based on a random sample of 395 Russian banks (86 of which defaulted) for the period of 2007-2017. The scale proposed by this paper has three features which distinguish it from existing scales: dynamic nature (quarterly probability of default estimates), compatibility with all rating agencies (base scale credit ratings), and a focus on Russian banks.Our results indicate that banks with high ratings are more stable just after the rating assignment, while a speculative bank’s probability of default decreases over time. Hence, we conclude that investors should account for not only the current rating grade of a bank, but also how long ago it was assigned. As a result, a rising capital strategy was formulated: the better a bank’s credit rating, the shorter the investment horizon should be and the closer the date of investment should be to the rating assignment date in order to minimise credit risk.The scientific novelty of this paper arises from the process of calibration of a rating grade to dynamic PD in order to evaluate the optimal time horizon of investments into a bank in each rating class. In practical terms, investors may use this scale not only to obtain a desired credit rating, but also to identify quantitative measure of credit risk, which will help to plan investment strategies and to calculate expected losses.

Credit risk signals in CDS market vs agency ratings

2016 ◽  
Vol 17 (2) ◽  
pp. 194-217 ◽  
Author(s):  
Michael Jacobs Jr ◽  
Ahmet K. Karagozoglu ◽  
Dina Naples Layish
Keyword(s):  
Credit Risk ◽  
Credit Rating ◽  
Credit Ratings ◽  
Credit Default Swap ◽  
Risk Assessments ◽  
Content Type ◽  
Rating Agencies ◽  
Market Participants ◽  
Credit Default ◽  
The Relationship

Purpose This research aims to model the relationship between the credit risk signals in the credit default swap (CDS) market and agency credit ratings, and determines the factors that help explain the variation in such signals. Design/methodology/approach A comprehensive analysis of the differences in the relative credit risk assessments of CDS-based risk signals and agency ratings is provided. It is shown that the divergence between credit risk signals in the CDS market and agency ratings is explained by factors which the rating agencies may consider differently than credit market participants. Findings The results suggest that agency credit ratings of relative riskiness of a reference entity do not always correspond with assessments by CDS spreads, as the price of risk is a function of additional macro and micro factors that can be explained using statistical analysis. Originality/value This research is unique in modeling the relationship between the credit risk assessments of the CDS market and the agency ratings, which to the best of the authors' knowledge has not been analyzed before in terms of their agreement and the level of discrepancy between them. This model can be used by investors in debt instruments that are not explicitly CDSs or which have illiquid CDS contracts, to replicate market-based, point-in-time credit risk signals. Based on both market-based and firm-specific factors in this model, the results can be used to augment through-the-cycle credit risk assessments, analyze issues surrounding the pricing of CDSs and examine the policies of credit rating agencies.

The impact of market sectors and rating agencies on credit ratings: global evidence

2019 ◽  
Vol 20 (5) ◽  
pp. 389-410
Author(s):  
Kerstin Lopatta ◽  
Magdalena Tchikov ◽  
Finn Marten Körner
Keyword(s):  
Credit Risk ◽  
Credit Rating ◽  
Credit Ratings ◽  
Content Type ◽  
Rating Agencies ◽  
Credit Rating Agency ◽  
Rating Agency ◽  
Investment Grade ◽  
The Impact ◽  
Rating Downgrades

Purpose A credit rating, as a single indicator on one consistent scale, is designed as an objective and comparable measure within a credit rating agency (CRA). While research focuses mainly on the comparability of ratings between agencies, this paper additionally questions empirically how CRAs meet their promise of providing a consistent assessment of credit risk for issuers within and between market segments of the same agency. Design/methodology/approach Exhaustive and robust regression analyses are run to assess the impact of market sectors and rating agencies on credit ratings. The examinations consider the rating level, as well as rating downgrades as a further measure of empirical credit risk. Data stems from a large global sample of Bloomberg ratings from 11 market sectors for the period 2010-2018. Findings The analyses show differing effects of sectors and agencies on issuer ratings and downgrade probabilities. Empirical results on credit ratings and rating downgrades can then be attributed to investment grade and non-investment grade ratings. Originality/value The paper contributes to current finance research and practice by examining the credit rating differences between sectors and agencies and providing assistance to investors and other stakeholders, as well as researchers, how issuers’ sector and rating agency affiliations act as relative metrics.

scholarly journals The Effect of Reputation Shocks to Rating Agencies on Corporate Disclosures

2018 ◽  
Vol 94 (1) ◽  
pp. 299-326 ◽  
Author(s):  
Mani Sethuraman
Keyword(s):  
Credit Risk ◽  
Voluntary Disclosure ◽  
Credit Rating ◽  
Credit Ratings ◽  
Earnings Forecasts ◽  
Corporate Bond ◽  
Management Earnings Forecasts ◽  
Rating Agencies ◽  
Theoretical Predictions ◽  
Bond Issuers

ABSTRACT This paper explores the effect of a credit rating agency's (CRA) reputation on the voluntary disclosures of corporate bond issuers. Academics, practitioners, and regulators disagree on the informational role played by major CRAs and the usefulness of credit ratings in influencing investors' perception of the credit risk of bond issuers. Using management earnings forecasts as a measure of voluntary disclosure, I find that investors demand more (less) disclosure from corporate bond issuers when the ratings become less (more) credible. In addition, using content analytics, I find that bond issuers disclose more qualitative information during periods of low CRA reputation to aid investors in assessing credit risk. My findings are consistent with credit ratings providing incremental information to investors and reducing adverse selection in lending markets. Further, consistent with theoretical predictions, my findings suggest that managers rely on voluntary disclosure as a credible mechanism to reduce information asymmetry in bond markets.

scholarly journals DEBTOR RATING AS A TOOL OF DEBT MANAGEMENT

2020 ◽  
pp. 121-129
Author(s):  
I. Hanus ◽  
I. Plikus ◽  
T. Zhukova
Keyword(s):  
Credit Risk ◽  
Default Risk ◽  
Credit Rating ◽  
Average Rate ◽  
Credit Ratings ◽  
Default Probability ◽  
Probability Of Default ◽  
Corporate Default ◽  
Ifrs 9 ◽  
Credit Losses

IFRS 9 “Financial Instruments” introduced a new model of impairment based on expected credit losses, in which the impairment is based on expected credit losses, and the provision for losses is recognized before the credit loss, i.e. companies recognize losses immediately after initial recognition of the financial asset and revise the amount of the provision for expected credit losses at the reporting date. To create a provision for credit losses, IFRS 9 allows using several practical tools, including the rating debtors’ method. However, IFRS 9 does not express a clear opinion on how the expected credit loss for receivables should be calculated. In this regard, in our opinion, it is possible to apply an individual approach to the choice of credit risk assessment method, determining the debtor’s credit rating and the choice of the default probability, and so on. The paper substantiates that the debtors’ rating by the level of corporate default risk is a method that can reliably assess the probable risks. This method uses credit ratings. The paper proposes using the international credit ratings, which will allow a more objective creditworthiness assessment of both foreign and domestic debtors, taking into account macroeconomic factors used by rating agencies to determine the class of credit risk. The article presents the credit rating of Ukraine and changes in the credit rating of Ukraine for 15 years (2004-2019), shows the model of applying the international default probability rates. Two variants of applying this model are offered. Under the first option, the total amount of receivables from the counterparty / group of debtors is multiplied by the percentage of default probability. The second option involves applying the selected ratio according to the credit rating class at the last stage of calculating the expected credit losses by the simplified method. Due to the fact that there is no single approach to choosing the probability of default and everything relies on expert opinion, we propose using the data of the Annual Global Corporate Default And Rating, which is an analysis of market conditions in the world, the corporate defaults overview, the coefficient of bankruptcy probability of economic entities for each of the risk groups. The paper proposes using the annual rate of corporate defaults, as the expected credit losses must be calculated by companies on a regular basis and revalued at least once a year (on the balance sheet date). It is substantiated that the use of the average rate (Average Rate) to assess the probability of default, it is this rate that takes into account the past experience of companies that are in the corresponding zone of default risk for all the periods under consideration.

Asset Securitizations and Credit Risk

2011 ◽  
Vol 87 (2) ◽  
pp. 423-448 ◽  
Author(s):  
Mary E. Barth ◽  
Gaizka Ormazabal ◽  
Daniel J. Taylor
Keyword(s):  
Credit Risk ◽  
Financial Reporting ◽  
Credit Rating ◽  
Credit Ratings ◽  
Bond Market ◽  
Credit Rating Agencies ◽  
Rating Agencies ◽  
Bond Spreads ◽  
Insight Into

ABSTRACT This study examines the sources of credit risk associated with asset securitizations and whether credit-rating agencies and the bond market differ in their assessment of this risk. Measuring credit risk using credit ratings, we find the securitizing firm's credit risk is positively related to the firm's retained interest in the securitized assets and unrelated to the portion of the securitized assets not retained by the firm. Measuring credit risk using bond spreads, we find the securitizing firm's credit risk is positively related to both the firm's retained interest in the assets and the portion of the securitized assets not retained by the firm. Additionally, our findings indicate the bond market does not distinguish between the retained and non-retained portions of the securitized assets when assessing the credit risk of the securitizing firm. These different assessments of sources of credit risk associated with asset securitizations provide insight into ongoing controversies surrounding the financial reporting for asset securitizations and the efficacy of credit ratings.

Do Credit Ratings Move Toward The Market, Or Vice Versa?

2018 ◽  
Keyword(s):  
Credit Risk ◽  
Financial Markets ◽  
Credit Rating ◽  
Credit Ratings ◽  
Credit Rating Agencies ◽  
Rating Agencies ◽  
Market Signals

There are many different gauges of credit risk that investors can use to inform their decisions. Credit rating agencies have produced measures of credit risk for many decades, but financial markets also offer a guide to these risks. The authors examine the behavior of ratings relative to market signals on credit risk. In particular, the authors examine what happens when ratings and market signals differ, in terms of any subsequent convergence (or not). They find that, on average, market signals move more frequently toward ratings than vice versa. In terms of the magnitude of these movements, however, the picture is less clear. When market signals suggest lower credit risk than ratings do, they tend to close more of the gap; when ratings are higher than market signals, however, sometimes ratings close the gap more.

Uncertain Meanings of Risk

2018 ◽  
Author(s):  
Natalia Besedovsky
Keyword(s):  
Financial Markets ◽  
Credit Rating ◽  
Traditional Approach ◽  
Credit Ratings ◽  
Assessment Practices ◽  
Structured Finance ◽  
Rating Agencies ◽  
Measures Of Risk ◽  
Methodological Approaches ◽  
Ontological Uncertainty

This chapter studies calculative risk-assessment practices in credit rating agencies. It identifies two fundamentally different methodological approaches for producing ratings, which in turn shape the respective conceptions of credit risk. The traditional approach sees ‘risk’ as an only partially calculable and predictable set of hazards that should be avoided or minimized. This approach is particularly evident in the production of country credit ratings and gives rise to ordinal rankings of risk. By contrast, structured finance rating practices conceive of ‘risk’ as both fully calculable and controllable; they construct cardinal measures of risk by assuming that ontological uncertainty does not exist and that models can capture all possible events in a probabilistic manner. This assumption—that uncertainty can be turned into measurable risk—is a necessary precondition for structured finance securities and has become an influential imaginary in financial markets.

scholarly journals Three Letters that Move the Markets: Credit Ratings between Market Information and Legal Regulation

2017 ◽  
Author(s):  
Ulrich G. Schroeter
Keyword(s):  
Financial Markets ◽  
Applied Research ◽  
Credit Rating ◽  
Credit Ratings ◽  
Legal Regulation ◽  
Legal Regulations ◽  
Market Information ◽  
Market Reactions ◽  
Rating Agencies ◽  
Sovereign Credit Ratings

Journal of Applied Research in Accounting and Finance, Vol. 6, No. 1 (2011), pp. 14-30As demonstrated by the market reactions to downgrades of various sovereign credit ratings in 2011, the credit rating agencies occupy an important role in today’s globalized financial markets. This article provides an overview of the central characteristics of credit ratings and discusses risks arising from both their widespread use as market information and from the increasing references to credit ratings contained in laws, legal regulations and private contracts.

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