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The Journal of Fixed Income

The Journal of Fixed Income

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Primary Article

Testing for Rating Consistency in Annual Default Rates

Richard Cantor and Eric Falkenstein
The Journal of Fixed Income Fall 2001, 11 (2) 36-51; DOI: https://doi.org/10.3905/jfi.2001.319296
Richard Cantor
Managing director of Ratings Research & Analysis at Moody's Investors Service in New York, NY.
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Eric Falkenstein
Formerly an analyst at Moody's Investors Services. He is now working for a hedge fund at Deephaven Capital Management in Minnetonka, MN. he may be contacted at efalken@deephavenfunds.com.
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Abstract

We examine issues in testing whether default rates by credit rating categories are consistent across sectors or consistent over time. Our main findings are that sector and macroeconomic shocks inflate the sample standard deviations, compared to using a simple binomial default probability, and we provide a closed form solution that addresses this problem. We apply these results to two well-known cases: testing rating consistency across regions (U.S. versus non-U.S. companies) and across industries (banks versus nonbanks).

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The Journal of Fixed Income
Vol. 11, Issue 2
Fall 2001
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Testing for Rating Consistency in Annual Default Rates
Richard Cantor, Eric Falkenstein
The Journal of Fixed Income Sep 2001, 11 (2) 36-51; DOI: 10.3905/jfi.2001.319296

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Testing for Rating Consistency in Annual Default Rates
Richard Cantor, Eric Falkenstein
The Journal of Fixed Income Sep 2001, 11 (2) 36-51; DOI: 10.3905/jfi.2001.319296
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More in this TOC Section

  • Annual Default Rates are Probably Less Than Long-Run Average Annual Default Rates
  • Crisis-Robust Bond Portfolios
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