Real Options Conference 2022

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What's in a trend: the dynamics of sticky corporate credit ratings

We propose a model of credit rating migrations that allows for the possibility of rating stickiness. The model aims to capture the mechanism of the rating process, based on the notion of hysteresis in real option models, that underlies the behavior of rating agencies and is used to explain the observed gradual deterioration in ratings. The paper contributes to the ongoing debate whether the downward trend in credit ratings results from the deteriorating credit quality or tightening rating standards. It is shown that corporate credit quality actually slightly improves over time and that there is asymmetry in rating migrations as upgrades become increasingly more difficult, while downgrade standards remaining unchanged.

Argyro Panaretou
Lancaster University
United Kingdom

Grzegorz Pawlina
Lancaster University
United Kingdom

Qifan Zhai
South China University of Technology


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