Abstract
This study documents nonstationarity of the bond rating process. The empirical evidence suggests that not only the parameter estimates exhibit nonstationarity but also the bond rating process itself. The source of nonstationarity is found to be externally caused and non agency-specific. Further examination leads us to stipulate that rating agencies apply stricter standards to lower grade issues than to higher grade one when the economy is in a recession. The results have implications for bond investment strategies as well as for the utilization of bond rating prediction models.
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