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Predicting credit rating changes conditional on economic strength

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  • Edirisinghe, Chanaka
  • Sawicki, Julia
  • Zhao, Yonggan
  • Zhou, Jun

Abstract

This paper develops a new structural model for predicting credit rating changes using firms’ accounting data in a regime-switching multinomial logistic regression analysis. The empirical analysis indicates that the probabilities of upgrade, downgrade, or no-change, are asymmetric across economic regimes. The asymmetry of credit rating changes between the high and low credit-rated firms appears to be significantly different. While high credit-rated firms’ upgrade probabilities do not differ in expansions and contractions, low credit-rated firms’ upgrade probabilities are significantly asymmetric in expansions and contractions. Furthermore, the probabilities of downgrade appear to be asymmetric in expansions and contractions for most of the credit rating levels.

Suggested Citation

  • Edirisinghe, Chanaka & Sawicki, Julia & Zhao, Yonggan & Zhou, Jun, 2022. "Predicting credit rating changes conditional on economic strength," Finance Research Letters, Elsevier, vol. 47(PB).
    • Handle: RePEc:eee:finlet:v:47:y:2022:i:pb:s1544612322000794
    DOI: 10.1016/j.frl.2022.102770
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    Cited by:

    1. Kim, Sung Ik, 2023. "A comparative study of firm value models: Default risk of corporate bonds," Finance Research Letters, Elsevier, vol. 56(C).
    2. Galil, Koresh & Hauptman, Ami & Rosenboim, Rosit Levy, 2023. "Prediction of corporate credit ratings with machine learning: Simple interpretative models," Finance Research Letters, Elsevier, vol. 58(PD).

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    More about this item

    Keywords

    Corporate bond rating; Credit risk; Macroeconomic indicators; Accounting variables; Markov regime-switching;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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