By Edward I. Altman
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Additional info for Corporate Bond Rating Drift: An Examination of Credit Quality Rating Changes over Time
The association between historical performance of the various bond rating classes and the credit quality changes across rating classes is a Corporate Bond Rating Drift meaningful analytic comparison. For example, we observed (Altman 1990b) that BBB-class mutual funds outperformed all other rating class categories in the 1980s and also that BBB new issues had the most favorable upgradeldowngrade balance in both the 1970s and the 1980s as well as for the entire 20-year sample period. A useful caveat is related to the temptation to blindly extrapolate historical results into the future.
Upgrade percentages also tended to increase in the most recent subperiod, but not nearly as much as downgrades. Thls confirms the conclusion that bond ratings, in general, were far less stable in the later decade. The reasons for this reduction in stability are many, including more economic and interest rate volatility, increased corporate leverage, lower cash flow and earnings coverages, and perhaps a greater propensity on the part of rating agencies to move more quickly and decisively to discover a firm's deterioration and reflect it in a downgrade.
Of the two simple Markov chains, the MKV-NS model outperformed its stationary counterpart for every rating through the seven-year transition. For the 10-year transition horizon, the MS model provided the highest (worst) chi-squares for the AA and BBB rating categories and lowest (best) for the AAAs. Corporate Bond Rating Drift TABLE 14. 01 level. Note: MKV-S = Stationary Markov chains, MKV-NS = Nonstationary Markov chains, MS = MoverStayer Model, and NIG = Noninvestment grade. Table 15 presents separate chi-square tests for the 1970s and the 1980s.
Corporate Bond Rating Drift: An Examination of Credit Quality Rating Changes over Time by Edward I. Altman