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Rating the credit rating agencies
Authors:Dror Parnes  Sagi Akron
Institution:1. Department of Finance and Management Science, Carson College of Business, T402SA, Washington State University, Pullman, WA, USA;2. Department of Business Administration, Faculty of Management, University of Haifa, Haifa, Israel
Abstract:We offer herein several policy tools that can assist the new Office of Credit Ratings within the Securities and Exchange Commission in assessing the quality of past credit ratings and thus measuring the inclusive competency of credit rating agencies. We propose to weigh the degrees of accuracy, consistency and total synchronization between a tested sample of past ratings and a benchmark array of flawless ratings. We also discuss various techniques to handle major discrepancies between these two arrays of credit ratings. We further explain and demonstrate the importance of different sample sizes. In addition, we present a simple approach to estimate the probability of convergence between the two matched sets of ratings under specified governing thresholds. Lastly, we illustrate the bulk of the theory with a concise empirical investigation.
Keywords:Dodd–Frank Act  office of credit ratings  NRSRO  flawless benchmark index  level of synchronization  Cartesian coordinate system  identity line
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