Do credit ratings see through business cycles?
Ραπτοπούλου, Όλγα Χ.
This paper studies the structure and performance of credit rating agencies and their interrelation to business cycles. In particular, using the one year default likelihoods, estimated with the Merton's model of distance of default and two more factors, the data are presented in graphs for 32 firms at an attempt to depict evidence of procyclicality and question the ability of credit rating agencies to see through the business cycles. Utilizing monthly data from the Bloomberg database for these firms we find only small evidence of procyclicality, which do not follow a specific pattern. However, their performance still raises questions for some cases about their methodology of rating through the cycle. Thus, the causes of the underperformance which is shown need to be reconsidered and other factors should be taken into consideration.