Searching for Consistent Indices of Rating Mobility Through the Crisis

The Great Crisis having a first trough in 2007-09 brought about a general reassessment in the perception of default risks. Thus, mobility of the ratings – with a noticeable prevalence of downgrades over upgrades – escalated particularly in structured finance but also in traditional corporate finance assets. Can we take a stance on this higher mobility? On one hand, in normal times, their increased mobility might lower the information content of the ratings. On the other hand, markets might expect heightened mobility of the ratings at a time of structural break in the perception of risk, as the one produced by the Great Crisis. Thus, it is difficult to judge whether the former line of reasoning or the latter should prevail. Furthermore, quantifying rating mobility is a non trivial issue, even more so at a time like this one when mobility is acutely unbalanced. Focusing on the three major credit rating agencies (CRAs: Moody’s, S&P’s and Fitch) and using the transition matrices they published, we address three research questions. First, we review the extent of rating mobility over a number of years into the crisis employing already available indices. We find that, indeed, mobility raised conspicuously for each of the three CRAs. Second, we propose a set of new indices that may be more consistent than the previous ones at measuring mobility of the ratings. The proposed indices higher consistency may stem either form their mathematical properties or from their being better suited to evaluate the observed especially skewed rating mobility. The comparison reveals the mobility assessments of the previous indices often differs markedly from that of the newly proposed indices. Third, we try to rank the mobility the three CRAs in terms of the various indices. While there are variations over time, a general ranking of the CRAs is possible and some of the newly proposed indices appear to make it neater.