An Anatomy of Rating through the Cycle

  title={An Anatomy of Rating through the Cycle},
  author={Gunter L{\"o}ffler},
Using an asset-based model of default, I derive rating characteristics if ratings are meant to look ‘through the cycle’ as opposed to being based on the borrowers’ current condition. The through-the-cycle method, which is employed by most rating agencies, requires a separation of permanent and cyclical components of default risk. In a time series setting, this can be done through the Kalman filter. The analysis shows that many empirical irregularities of agency ratings could be the consequence… CONTINUE READING
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