Are Credit Ratings Procyclical?

Amato, Jeffery D.; Furfine, Craig

doi:10.2139/ssrn.384080

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Are Credit Ratings Procyclical?

Bank for International Settlements Working Paper No. 129

52 Pages Posted: 13 Dec 2005

See all articles by Jeffery D. Amato

Craig Furfine

Kellogg School of Management - Department of Finance

Date Written: February 2003

Abstract

This paper studies the influence of the state of the business cycle on credit ratings. In particular, we assess whether rating agencies are excessively procyclical in their assignment of ratings. Our analysis is based on a model of ratings determination that takes into account factors that measure the business and financial risks of firms, in addition to indicators of macroeconomic conditions. Utilizing annual data on all US firms rated by Standard & Poor's, we find little evidence of procyclicality in ratings. By contrast, we find that initial ratings and rating changes exhibit excess sensitivity to the business cycle. The paper offers two explanations of these results.

Keywords: rating agencies, business cycles, credit risk

JEL Classification: G20, G28, G32

Suggested Citation: Suggested Citation

Amato, Jeffery D. and Furfine, Craig, Are Credit Ratings Procyclical? (February 2003). Bank for International Settlements Working Paper No. 129, Available at SSRN: https://ssrn.com/abstract=384080 or http://dx.doi.org/10.2139/ssrn.384080