AVOIDING THE RATING BOUNCE: WHY RATING AGENCIES ARE SLOW TOREACT TO NEW INFORMATION

Rating agencies state that they take a rating action only when it is unlikely to bereversed shortly afterwards. Using a formal representation of the rating process, I showthat such a policy provides a good explanation for the empirical evidence: ratingchanges relatively seldom occur, they exhibit serial dependence, and they lag changes inthe issuers’ default risk. In terms of informational losses, avoiding rating reversals canbe more harmful than monitoring credit quality only twice per year. [Gunter Löffler]5