Timeliness of Spread Implied Ratings


  • We are grateful to Frank Skinner, Chris Brooks, Herbert Rijken and an anonymous referee for insightful comments and suggestions that greatly improved the quality and presentation of the paper. We would also like to thank Jean-Martin Aussant, Emese Lazar, Naoufel El-Bachir and participants in the 2005 China International Conference in Finance and the 2005 C.R.E.D.I.T Conference on ‘Counterparty Credit Risk’ for helpful comments. All errors and omissions are our responsibility. This paper was previously titled ‘Predicting agency rating migrations with spread implied ratings.


Rating agencies are known to be prudent in their approach to rating revisions, which results in delayed rating adjustments. For a large set of eurobonds we derive credit spread implied ratings and compare them with agency ratings. Our results indicate that spread implied ratings often anticipate the future movement of agency ratings and hence can help track credit risk in a more timely manner. This finding has important implications for risk managers in banks who, under the new Basel 2 regulations, have to rely more on credit ratings for capital allocation purposes, and for portfolio managers who face rating-related investment restrictions.