John Ammer

How Consistent Are Credit Ratings? A Geographic and Sectoral Analysis of Default Risk

We examine differences in default rates by sector and obligor domicile. We find evidence that credit ratings have been imperfectly calibrated across issuer sectors in the past. Controlling for year of issue and rating, default rates appear to be higher for U.S. financial firms than for U.S. industrial firms. Sectoral differences in recovery rates do not offset the higher default rates. By contrast, we do not find significant differences in default rates between U.S. and foreign firms.

Good News is No News? The Impact of Credit Rating Changes on the Pricing of Asset-Backed Securities

We assess the impact of credit ratings on the pricing of structured financial products, using a sample of more than 1300 changes in Moodys or Standard and Poors (S&P) ratings of U.S. asset-backed securities (ABS). We find that rating downgrades tend to be accompanied by negative returns and widening spreads, with the average effects stronger than those that have been reported in prior research on corporate and sovereign bond ratings. A portion of the negative implications of ABS downgrades are anticipated by price movements ahead of the rating action, although to a lesser degree than has been found for bond ratings. Accordingly, ABS market participants appear to rely somewhat more on rating agencies as a source of negative news about credit risk. Nevertheless, because ABS rating downgrades are relatively rare events, their effects account for only a small fraction of the variance of returns. In contrast to our results on downgrades, market reactions to ABS rating upgrades are virtually zero, on average. Together, the results imply even greater asymmetry in the value-relevance of ABS rating changes than has been found in event studies of changes in bond ratings.

Low-For-Long Interest Rates and Portfolio Shifts in Advanced Foreign Economies

For the past several years, interest rates in many advanced economies have been at historic lows. Although low interest rates have helped support recovery in these economies, persistently low rates have also raised concerns about increased incentives for risk-taking by investors to achieve higher yields.