Abstract
Recently downgraded corporate bond issuers have different transition and default risks from recently upgraded issuers with the same ratings. Rating transition and default rates are found to be sensitive to both rating history and outlook and rate review status, when viewed in isolation. Controlling for outlook status, the effects of rating history are diminished and the power of ratings as predictors of default grows substantially. Adjusting credits on review by two notches (up or down) and adjusting ratings for outlook status by one notch (up or down) raises the Moody9s three-year horizon accuracy ratio (AR) from 0.65 to 0.71. Adjusting for rating history adds only an additional 0.002 to the AR score. The adjusted ratings are more accurate than the bond implied ratings at a three-year horizon.
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