Home » Variability of Default Rates by Rating Category

Variability of Default Rates by Rating Category

Variability of Default Rates by Rating Category Moody’s ratings measure relative risk over a continuous horizon and do not target specific expected default probabilities over specific horizons. Realized default frequencies are, in fact, quite variable over short periods of time. For example, as indicated in Exhibit 6, the standard deviation of five-year cumulative default rates is almost as large — and in Aaa through A categories, larger — than the mean five-year default rate for those same rating categories.

Exhibit 6 also shows that there is greater dispersion of default outcomes at lower rating categories. This greater dispersion is the result of two contributing factors. Economic events have a greater impact on lower- rated firms due to their greater vulnerability to shocks. Also, Moody’s typically adjusts ratings modestly — not sharply — through the credit cycle because the amplitude and timing of cycles are inherently hard to predict.

Don't use plagiarized sources. Get Your Custom Essay on
Variability of Default Rates by Rating Category
Just from $9/Page
Order Essay

The reason why there is dispersion in actual default rates for annual cohorts is that Moody’s does not endeavor to maintain constant ex-post default rates in various credit cycles. Given that Moody’s ratings tar- get multiple horizons, even with perfect information about the credit cycle, it would be difficult to prescribe the “correct” amount by which ratings should adjust in response to cyclical variations while maintaining constant ex-post default rates for each horizon.

Some investors, however, are very concerned with the expected absolute default rate associated with rat- ings over short horizons—particularly in the high-yield sector. To meet these investors’ needs, Moody’s pro- vides a model-based, monthly forecast of the one-year-ahead, speculative-grade default rate. This model, and models like it, can be used by investors to translate Moody’s “through-the-cycle” relative rating system to a “point-in-time” cardinal rating system.

Place your order
(550 words)

Approximate price: $22

Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
The price is based on these factors:
Academic level
Number of pages
Basic features
  • Free title page and bibliography
  • Unlimited revisions
  • Plagiarism-free guarantee
  • Money-back guarantee
  • 24/7 support
On-demand options
  • Writer’s samples
  • Part-by-part delivery
  • Overnight delivery
  • Copies of used sources
  • Expert Proofreading
Paper format
  • 275 words per page
  • 12 pt Arial/Times New Roman
  • Double line spacing
  • Any citation style (APA, MLA, Chicago/Turabian, Harvard)

Our guarantees

Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.

Money-back guarantee

You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.

Read more

Zero-plagiarism guarantee

Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.

Read more

Free-revision policy

Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.

Read more

Privacy policy

Your email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.

Read more

Fair-cooperation guarantee

By sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.

Read more
Open chat
You can contact our live agent via WhatsApp! Via +1 817 953 0426

Feel free to ask questions, clarifications, or discounts available when placing an order.
  +1 (301) 710 0002           + 44 161 818 7126           [email protected]
  + 44 161 818 7126         [email protected]