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Efficiency and credit ratings: a permutation-information-theory analysis

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  • Aurelio F. Bariviera
  • Luciano Zunino
  • M. Belen Guercio
  • Lisana B. Martinez
  • Osvaldo A. Rosso

Abstract

The role of credit rating agencies has been under severe scrutiny after the subprime crisis. In this paper we explore the relationship between credit ratings and informational efficiency of a sample of thirty nine corporate bonds of US oil and energy companies from April 2008 to November 2012. For that purpose, we use a powerful statistical tool relatively new in the financial literature: the complexity-entropy causality plane. This representation space allows to graphically classify the different bonds according to their degree of informational efficiency. We find that this classification agrees with the credit ratings assigned by Moody's. Particularly, we detect the formation of two clusters, that correspond to the global categories of investment and speculative grades. Regarding to the latter cluster, two subgroups reflect distinct levels of efficiency. Additionally, we also find an intriguing absence of correlation between informational efficiency and firm characteristics. This allows us to conclude that the proposed permutation-information-theory approach provides an alternative practical way to justify bond classification.

Suggested Citation

  • Aurelio F. Bariviera & Luciano Zunino & M. Belen Guercio & Lisana B. Martinez & Osvaldo A. Rosso, 2015. "Efficiency and credit ratings: a permutation-information-theory analysis," Papers 1509.01839, arXiv.org.
    • Handle: RePEc:arx:papers:1509.01839
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    Cited by:

    1. Aurelio Fernández Bariviera & M. Belén Guercio & Lisana B. Martinez, 2014. "Informational Efficiency in Distressed Markets: The Case of European Corporate Bonds," The Economic and Social Review, Economic and Social Studies, vol. 45(3), pages 349-369.
    2. Jiamin Yu, 2021. "Three fundamental problems in risk modeling on big data: an information theory view," Papers 2109.03541, arXiv.org.
    3. Zunino, Luciano & Bariviera, Aurelio F. & Guercio, M. Belén & Martinez, Lisana B. & Rosso, Osvaldo A., 2016. "Monitoring the informational efficiency of European corporate bond markets with dynamical permutation min-entropy," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 456(C), pages 1-9.

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