Capital markets all over the world have undergone fundamental changes in the last twenty years and the most prominent developments have been: disintermediation and securitization, globalization and financial innovations. This process has been accelerated by worldwide deregulation tendencies, as well as progress and global proliferation of transactional data processing and transmission technology. The rational investor disposing of limited time and means for making a decision has been thus confronted with new challenges in a global environment dominated by almost infinite and very complex investment possibilities. Because of limited resources, private clients as well as institutional investors have been increasingly overwhelmed by internally assessing credit risk and have sought for additional evaluations from external specialists in order to build an opinion about the risk and return profile of an obligation . With this background, rating issued by major international rating agencies has come to play a key role in the making of investment decisions and in supervisory regulation. It is especially important in this context to understand the impact of rating changes on capital markets.
The influence of rating changes on bond prices is subject of controversial discussions. Despite the undisputable importance of rating in markets, the debate has been fueled by spectacular insolvencies of high rated companies, such as Enron, WorldCom and Parmalat. Accordingly, measuring and assessing the information content of ratings has been in the United States the object of intense theoretical and empirical research for decades, and the lively ongoing dispute surrounding the topic is far from being concluded. However, analyses on this subject were not initiated outside the US market until the last years. This is especially surprising in the context of international markets, with different accounting and investment regulations, where advantages of rating are even greater. The integration of national financial markets, Basel II impulses and the expansion of rating activities on global level have amplified the necessity of research in this field.
Therefore, it is of paramount importance for the future of the financial sector to thoroughly investigate information content of rating and its impact on securities prices in order to build a solid scientific foundation for this subject and to thus present a reliable frame of reference for the activities of financial markets.
Inhaltsverzeichnis (Table of Contents)
- Introduction
- Presentation of the Problem
- Basic Concepts
- Objective and Structure of the Thesis
- Rating of Corporate Bonds
- Definition and Role of Credit Rating on the Capital Market
- Historical Development
- Rating Classification
- The Rating Process
- Organization
- Analysis Criteria of Rating Agencies
- Qualitative Aspects in the Analysis of Company Risk
- Quantitative Aspects in the Analysis of Company Risk
- The Rating Market of Corporate Bonds
- The Influence of Rating Changes on Bonds
- The Interdependence between Bond Credit Risk and Rating
- Bond Ratings and Credit Risk
- Theoretical Models for Credit Risk Evaluation
- Statistical Prediction of Default Likelihood - Stochastic Processes
- Option-theoretic Approach
- Credit Rating Models in Practice
- Migration Analysis
- Credit Risk Practical Applications
- Influence of Rating Changes on Bonds in Theory and Practice
- Rating in the Neoclassical Financial Theory
- The Concept of Information Efficient Markets
- Theoretical Relevance of Rating in Efficient Markets
- Information Basis of Rating Verdicts
- Hypotheses about Influence of Rating Changes on Bonds Prices
- Rating in Real Capital Markets – Empirical Research
- Event Studies
- Conclusions
- Explanations of Divergences between Theoretical and Empirical Research
- The Non-equidistant Character of Rating Verdicts
- Different Definitions of Risk
- Investment Regulations and Restrictions
- Significant Examples of Rating Influence on Corporate Bonds
- Telefonica
- General Motors
- Influence of Rating Changes of a Bond on other Investment Alternatives
- Contemporary Aspects of Rating Influence on Capital Markets
- Rating in Germany
- Rating of Landesbanken and Savings Bank
- Rating and Basel II
- Possibilities and Limits of Rating
- The interrelationship between credit risk and rating
- The impact of rating changes on bond prices
- The theoretical and empirical evidence of rating influence on the capital market
- The role of rating agencies in providing information and shaping market dynamics
- The implications of rating changes for investors and market participants
- Introduction: This chapter introduces the research topic by defining the problem, presenting the basic concepts related to credit risk and rating, and outlining the thesis's objectives and structure.
- Rating of Corporate Bonds: This chapter discusses the definition, role, historical development, and classification of credit ratings in the capital market. It also details the rating process, including the organization, analysis criteria, and qualitative and quantitative aspects considered by rating agencies.
- The Influence of Rating Changes on Bonds: This chapter examines the relationship between bond credit risk and rating, analyzing theoretical models for credit risk evaluation and credit rating models used in practice. It further investigates the theoretical and empirical evidence of rating influence on bond prices, discussing hypotheses about the impact of rating changes and presenting findings from event studies.
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This thesis examines the impact of rating changes on the pricing of corporate bonds, aiming to provide a comprehensive analysis from both theoretical and empirical perspectives. It investigates the relationship between credit risk and rating, explores the role of rating agencies in the capital market, and analyzes the influence of rating changes on bond yields. The research is grounded in neoclassical financial theory and incorporates empirical studies to understand how rating decisions affect real-world market behavior.
Zusammenfassung der Kapitel (Chapter Summaries)
Schlüsselwörter (Keywords)
The primary focus of this thesis revolves around corporate bonds, credit risk, and the influence of rating changes on bond pricing. Key themes include theoretical models for credit risk evaluation, empirical research on the impact of rating changes, and the role of rating agencies in shaping market dynamics. Relevant terms include bond ratings, credit spreads, event studies, migration analysis, and the concept of information efficient markets.
- Quote paper
- Alina Elena Negrila (Author), 2006, The Influence of Rating Changes on Bonds, Munich, GRIN Verlag, https://www.grin.com/document/58888
