How Rating Agencies Achieve Rating Stability

49 Pages Posted: 5 Nov 2008

See all articles by Edward I. Altman

Edward I. Altman

New York University (NYU) - Salomon Center; New York University (NYU) - Department of Finance

Herbert A. Rijken

Vrije Universiteit Amsterdam (Free University)

Date Written: December 2003

Abstract

Surveys on the use of agency credit ratings reveal that most investors believe that rating agencies are relatively slow in adjusting their ratings. A well-accepted explanation for this perception on the timeliness of agency ratings is the "through-the-cycle" methodology, which agencies apply in their rating assessments, while investors have a "point-in-time" perception on the creditworthiness. The â¬Sthrough-the-cycleâ¬? methodology aims to suppress the sensitivity of the ratings to short-term fluctuations in credit quality. This article focuses on the migration policy of rating agencies as a second source of rating stability. In a benchmark study with credit scoring models we show that both the "through-the-cycle" methodology and the conservative migration policy are responsible for the investors' perception of the rigidity of agency ratings.

Keywords: Rating Agencies, "through-the-cycle" rating methodology, migration policy, credit scoring models

Suggested Citation

Altman, Edward I. and Rijken, Herbert A., How Rating Agencies Achieve Rating Stability (December 2003). NYU Working Paper No. S-CDM-03-12, Available at SSRN: https://ssrn.com/abstract=1295796

Edward I. Altman (Contact Author)

New York University (NYU) - Salomon Center ( email )

44 West 4th Street
New York, NY 10012
United States
212-998-0709 (Phone)
212-995-4220 (Fax)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
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New York, NY 10012-1126
United States

Herbert A. Rijken

Vrije Universiteit Amsterdam (Free University) ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
+31 20 5986101/6060 (Phone)
+31 20 5986020 (Fax)

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