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Credit Rating

  1. Adam Ashcraft,
  2. Til Schuermann

Published Online: 15 MAY 2010

DOI: 10.1002/9780470061602.eqf09020

Encyclopedia of Quantitative Finance

Encyclopedia of Quantitative Finance

How to Cite

Ashcraft, A. and Schuermann, T. 2010. Credit Rating. Encyclopedia of Quantitative Finance. .

Author Information

  1. Federal Reserve Bank of New York, New York, NY, USA

Publication History

  1. Published Online: 15 MAY 2010

Abstract

A credit rating represents an overall assessment of the creditworthiness of a borrower. In this way the rating is a forecast, and like all forecasts it is noisy. For that reason, credit rating agencies make use of discrete ratings. Such a rating may also be generated by a model internal to a financial institution like a bank for the assessment of credit risk, specifically for the probability of default. Ratings typically depend on firm (or household) financial information such as indebtedness (leverage), revenue, profitability, and so on. Because defaults are rare, it is very difficult to assess the accuracy of a given rating model. Although the rating scale for structured credit products is the same as for single obligor ratings, risk assessment is quite different. Corporate bond (obligor) ratings are largely based on firm-specific risk characteristics. Since asset-backed structures represent claims on cash flows from a portfolio of underlying assets, the rating of a structured credit product must take into account systematic risk.

Keywords:

  • credit risk;
  • credit rating;
  • probability of default;
  • risk management