On the Economic Sources of Changes in Credit Ratings

University essay from Lunds universitet/Nationalekonomiska institutionen

Abstract: In this thesis, the focus lies on the determinants of changes in credit ratings. Multiple regression is used to study the relation between credit ratings and a quantity of selected economic variables. The study is restricted to the US market and the ratings have been assigned by Moody’s during the period 1999-2008. In line with previous studies, the short-term interest rate and corporate profits are important determinants of rating changes. The result shows that other important factors are the capacity utilization rate and the rate of inflation. Finally, evidence is found that the number of rating changes is procyclical. This leads to the conclusion that if banks use the standardized approach in BIS II, bank capital requirements will be adjusted more frequently when the economy is growing.

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