Reliability and Agreement of Credit Ratings in the Mexican Fixed Income Market
22 Pages Posted: 30 Nov 2015
Date Written: November 29, 2015
Credit ratings play an important role in the fixed income market as the entire regulatory framework of this market segment is based on them and a significant part of what investors can and cannot do is dictated by ratings. Also, a number of ratings-based metrics are employed globally to estimate capital reserves, liquidity buffers, and solvency standards for many institutional investors such as insurance companies and pension funds. A critical assumption at the root of this regulatory architecture is that the credit-rating scales of the three leading agencies (Moody’s, Fitch, and Standard & Poor’s) are completely equivalent.
In this study we focus on the Mexican fixed income market. We find that the ratings of all three rating agencies exhibit a very high degree of inter-rater reliability. This means that in terms of ranking a group of bonds based on creditworthiness the three rating agencies would produce very similar results.
On the other hand, using a non-parametric statistic, the Wilcoxon matched-pairs test, we conclude that there are significant discrepancies among the ratings of the three agencies. This is consistent with a low level of inter-rater agreement detected. These findings challenge the suitability of credit ratings as a useful metric for regulatory purposes as they create the possibility of arbitrage.
Keywords: credit ratings; rating agencies; bond markets; financial regulation
JEL Classification: G24, G15, F3
Suggested Citation: Suggested Citation