Empirical study of the relationship between credit cycles and changes in credit ratings

The purpose of this study is to identify relationships between changes in ratings and the impact of credit cycles on them. The following methodology was used: we built up an applied statistical probit-model of multiple-choice to determine ratings changes. Our model includes a credit gap indicator for assessing the impact of the credit cycle. Our empirical research also includes a review of the time changes in the ratings during a ten-year period for developed and developing countries. The results of our study show that credit ratings are not only affected by cyclical changes within the credit cycle, but also are delayed in its relation to the cycle. From a practical point of view, these results indicate the practical need to take into account various macroeconomic factors because of the impact of credit cycles for forecasting and risk management in financial markets. During the changes of credit cycles, the rating agencies consider the shifts in macrostructure and in valuation of parameters accordingly to the distribution and ratings proportion for investment and speculative ratings classes. The level of credit ratings and credit gap indicator are strongly influenced by two macroeconomic factors: GDP growth rates and credit spread, the last impact factor relates to the mechanism of monetary policy (as a narrow lending channel). In the end of the credit cycle and the stage of recession (downturn), which is marked by empirical evidence, large number of speculative credit ratings occur and the credit spread begins increase which leads to the rise of negative effects in financial markets.