Credit Ratings and Credit Risk: Is One Measure Enough?

Jens Hilscher, Mungo Wilson
2017 Management science  
This paper investigates the information in corporate credit ratings from a positive and normative perspective. If ratings are to be informative indicators of credit risk they must re ‡ect what a risk-averse investor cares about: both raw default probability and systematic risk. We ...nd that ratings are inaccurate measures of raw default probability -they are dominated as predictors of failure by a simple model based on publicly available ...nancial information. However, ratings do contain
more » ... ngs do contain relevant information since they are related to a measure of exposure to common (and undiversi...able) variation in default probability, exposure that is related to CDS risk premia. Given the multidimensional nature of credit risk, it is not possible for one measure to capture all the relevant information. In consequence, ratings may be prone to misinterpretation. JEL Classi...cation: G12, G24, G33
doi:10.1287/mnsc.2016.2514 fatcat:vc6nwpvvtvaobly4evlbu763f4