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Assessment of Credit Ratings and Credit Risk Models on Public Bonds

Karyl B. Leggio, Yoon S. Shin and Yuxing Yan
The Journal of Fixed Income Spring 2021, jfi.2021.1.104; DOI: https://doi.org/10.3905/jfi.2021.1.104
Karyl B. Leggio
is a professor of finance at Loyola University Maryland in Baltimore, MD
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Yoon S. Shin
is a professor of finance at Loyola University Maryland in Baltimore, MD
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Yuxing Yan
is an assistant professor of finance at SUNY Geneseo in Geneseo, NY
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Abstract

We investigate the performance of two different credit risk models, the credit ratings of S&P and the market-based credit risk models of Bloomberg, using 12,679 new corporate bonds issued by 933 firms through public offerings in the United States over the 1999–2015 period. In particular, we divide our sample into bonds issued by financial firms and those issued by non-financial firms, and find that (1) even though both the S&P ratings and the Bloomberg models affect the yield spreads significantly, the former has more statistical power in determining the yield spreads; (2) bond ratings of financial firms are higher than those of non-financials, but financial firms pay a higher cost of debt than non-financial firms; (3) S&P credit ratings are superior to Bloomberg models in predicting actual default of the bonds; and (4) financial firms are less likely to default than non-financial firms.

TOPICS: Credit risk management, information providers/credit ratings, fixed income and structured finance, performance measurement

Key Findings

  • ▪ S&P’s ratings are better than Bloomberg models in determining the yield spreads.

  • ▪ S&P’s ratings are superior to Bloomberg models in predicting the actual default of bonds.

  • ▪ Financial firms are less likely to default than non-financial firms.

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The Journal of Fixed Income: 30 (3)
The Journal of Fixed Income
Vol. 30, Issue 3
Winter 2021
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Assessment of Credit Ratings and Credit Risk Models on Public Bonds
Karyl B. Leggio, Yoon S. Shin, Yuxing Yan
The Journal of Fixed Income Jan 2021, jfi.2021.1.104; DOI: 10.3905/jfi.2021.1.104

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Assessment of Credit Ratings and Credit Risk Models on Public Bonds
Karyl B. Leggio, Yoon S. Shin, Yuxing Yan
The Journal of Fixed Income Jan 2021, jfi.2021.1.104; DOI: 10.3905/jfi.2021.1.104
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