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Rating Changes - Can they be predicted with the Merton model?

Rebeggiani, Simone LU and Westerlund, Marcus (2012) FEKN90 20121
Department of Business Administration
Abstract
Purpose: The purpose of the thesis was to investigate if the Merton model had any predictive power of changes in Moody’s credit ratings and if there was a difference in the predictability between upgrades and downgrades. This was done in an effort to either support or dismiss the opinion that credit ratings are lagging.

Methodology: The distance-to-default (DD) was calculated with the Merton model. The DD’s and the credit ratings were run in logit regressions.

Theoretical perspectives: The Merton model by Robert C. Merton (1974) which is based upon the work by Black and Scholes (1973).

Empirical foundation: A sample of 100 American, non-financial public companies constituted the foundation for the study.

Conclusions: Some... (More)
Purpose: The purpose of the thesis was to investigate if the Merton model had any predictive power of changes in Moody’s credit ratings and if there was a difference in the predictability between upgrades and downgrades. This was done in an effort to either support or dismiss the opinion that credit ratings are lagging.

Methodology: The distance-to-default (DD) was calculated with the Merton model. The DD’s and the credit ratings were run in logit regressions.

Theoretical perspectives: The Merton model by Robert C. Merton (1974) which is based upon the work by Black and Scholes (1973).

Empirical foundation: A sample of 100 American, non-financial public companies constituted the foundation for the study.

Conclusions: Some evidence for that credit ratings are lagging was found. The Merton model had some predictive power of rating changes, especially for downgrades. (Less)
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author
Rebeggiani, Simone LU and Westerlund, Marcus
supervisor
organization
course
FEKN90 20121
year
type
H1 - Master's Degree (One Year)
subject
keywords
The Merton model, credit risk, credit rating, rating changes, rating prediction
language
English
id
2540753
date added to LUP
2012-06-19 11:36:03
date last changed
2012-06-19 11:36:03
@misc{2540753,
  abstract     = {Purpose: The purpose of the thesis was to investigate if the Merton model had any predictive power of changes in Moody’s credit ratings and if there was a difference in the predictability between upgrades and downgrades. This was done in an effort to either support or dismiss the opinion that credit ratings are lagging.

Methodology: The distance-to-default (DD) was calculated with the Merton model. The DD’s and the credit ratings were run in logit regressions.

Theoretical perspectives: The Merton model by Robert C. Merton (1974) which is based upon the work by Black and Scholes (1973).

Empirical foundation: A sample of 100 American, non-financial public companies constituted the foundation for the study.

Conclusions: Some evidence for that credit ratings are lagging was found. The Merton model had some predictive power of rating changes, especially for downgrades.},
  author       = {Rebeggiani, Simone and Westerlund, Marcus},
  keyword      = {The Merton model,credit risk,credit rating,rating changes,rating prediction},
  language     = {eng},
  note         = {Student Paper},
  title        = {Rating Changes - Can they be predicted with the Merton model?},
  year         = {2012},
}