Rating models: emerging market distinctions

📝 Abstract

The Basel II Accords have sparked increased interest in the development of approaches based on internal ratings systems and have initiated the elaboration of models for remote ratings forecasts based on external ones as part of Risk Management and Early Warning Systems. This article evaluates the peculiarities of current ratings systems and addresses specific issues of development of econometrical rating models for emerging market companies.

💡 Analysis

The Basel II Accords have sparked increased interest in the development of approaches based on internal ratings systems and have initiated the elaboration of models for remote ratings forecasts based on external ones as part of Risk Management and Early Warning Systems. This article evaluates the peculiarities of current ratings systems and addresses specific issues of development of econometrical rating models for emerging market companies.

📄 Content

Rating models: emerging market distinctions*

ALEXANDER KARMINSKY†

Abstract The Basel II Accords have sparked increased interest in the development of approaches based on internal ratings systems and have initiated the elaboration of models for remote ratings forecasts based on external ones as part of Risk Management and Early Warning Systems. This article evaluates the peculiarities of current ratings systems and addresses specific issues of development of econometrical rating models for emerging market companies. Financial indicators, market-value appraisals and macroeconomic indicators of different countries were used as explanatory variables. Standard & Poor’s and Moody’s ratings were considered as modeling ratings.

Keywords: corporate ratings, models, financial risk. JEL codes: G21, G32.

• Series WP7 «Mathematical methods for decision making in economics, business and politics»; Paper WP7/2010/06; Original text: https://www.hse.ru/data/2010/09/23/1223926390/WP7_2010_06.pdf
  † † State University Higher School of Economics, 109028, Moscow, Russia, Pokrovskiy bul., 11, J-417; e- mail: akarminsky@hse.ru). I would like to thank Anatoly Peresetsky for his helpful comments.

1. Introduction Ratings are in high demand in market-driven economies. Within a business setting, the rating process has a moral component. A Rating agency’s reputational capital serves as a regulatory element (Partnoy, 2002). In addition to independent appraisals of investment risk in the form of the rating agency’s opinion, ratings also function as a sort of licensing. The Basel II Accord (Basel, 2004) has sparked increased interest in ratings and their models. The development of approaches based on internal ratings systems has a practical interest, especially for developing markets. The topic has received increased attention in connection with the global crisis that began in 2007.
   In this work, we analyzed possibilities for modeling ratings applied to industrial companies and banks of developing countries. Emphasis was placed on the elaboration of econometric models. As explanatory variables, financial indicators (which characterize the activities of a company), market indicators (which reflect the dynamics of its stock quotations), and macroeconomic variables and dummies of industrial and country affiliations were employed.
   Ratings of Moody’s Investors Service and Standard & Poor’s agencies were considered as modeling ratings. This made the evaluation of the specific approaches of each of these agencies possible. Samples were made up of data from these agencies and the Bloomberg information agency.
   Analysis of the predictive power of the derived econometric models allowed for an appraisal of these models to be made. Particular attention was paid to variables in rating models in accordance with their affiliations with developing countries or with particular industries. It was shown that industry and group of countries affiliation influences ratings. The work consists of seven sections. The second section addresses the particularities of ratings as a measurement of risk in Russia and the countries of Central and Eastern Europe. A comparison of the methodologies of the two leading agencies was the subject of the third section. In Section 4, there is an examination of the types of models used and the formation and statistical characteristics of the samples.
   Models of corporate ratings and bank ratings pertaining to developing markets and a comparison of ratings of Moody’s and S&P were systematized in Sections 5 and 6. Conclusions were presented in the final section.

2. Development of ratings services in developing countries
   To begin with, we will consider rating opportunities in Russia. We can observe several waves of interest in these instruments. The entry of the international rating agencies and the ratings they made in Russia (beginning in

1996. had little impact before the 1998 financial crisis or immediately after it. The opportunity for foreign borrowing, including borrowing by industrial companies beginning in 2003, gave impetus to their development. The number of ratable objects has more than tripled since then, reaching more than 300 at the beginning of 2009 (about half of them are banks and more than a third are companies.) The process was encouraged when Russia received investment- level ratings in 2005-2006.
      The crisis of 2008-2009 has had an effect on the rating process. A number of ratings were withdrawn. Russia’s sovereign ratings were lowered by Standard & Poor’s and Fitch Ratings by one grade, although the ratings remained on the investment level at BBB. The insignificant lowering of sovereign ratings did not dampen interest in them from economically active objects, as happened in 1998.
      Although a large portion of bank ratings was assigned by Moody’s Investors Service (herei

This content is AI-processed based on ArXiv data.