Deriving Consensus Ratings of the Big Three Rating Agencies

• Main Authors: Grün, Bettina, Hofmarcher, Paul, Hornik, Kurt, Leitner, Christoph, Pichler, Stefan
• Format: Others
• Language: en
• Published: Incisive Financial Publishing 2013
• Subjects: Bayesian estimation / consensus information / credit ratings / external rating agencies / rating validation
• Online Access: http://epub.wu.ac.at/4052/1/consensus_Rev3.pdf

This paper introduces a model framework for dynamic credit rating processes. Our framework aggregates ordinal rating information stemming from a variety of rating sources. The dynamic of the consensus rating captures systematic as well as idiosyncratic changes. In addition, our framework allows to validate the different rating sources by analyzing the mean/variance structure of the rating deviations. In an empirical study for the iTraxx Europe companies rated by the big three external rating agencies we use Bayesian techniques to estimate the consensus ratings for these companies. The advantages are illustrated by comparing our dynamic rating model to a naive benchmark model. (authors' abstract)