Credit Rating under Ambiguity
Date: 03 March 2025 11:40-12:40
Location: Corvinus University of Budapest, building E, Institute of Finance, room E.279.1.
We analyze how a credit rating agency should determine a corporate rating, when its group of analysts holds heterogeneous beliefs. In a dynamic game with feedback effects, a firm with rating-dependent cost of capital signals its quality by surviving phases of apparent distress. The credit analysts adjust their beliefs in response to firm survival. In contrast to classical min-max results under ambiguity, we show that the rating agency should select a dynamically adjusted weighted average of multiple beliefs, giving higher weights to beliefs with higher variance. The ambiguity impact on ratings hinges on whether the disagreement between the analysts has a common direction: If so, the aggregate rating gives more weight to the less extreme beliefs, and jointly pessimistic (optimistic) analysts make the firm delay (accelerate) default.
Joint work with Christian Hilpert, Stefan Hirth, Jan Pape.
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