A0745
Title: Stock Returns around Credit Migration Probabilities
Authors: Periklis Brakatsoulas - Charles University, Faculty of Social Sciences (Czech Republic) [presenting]
Abstract: The aim is to develop an asset price portfolio approach accounting for credit rating announcements and using quarterly position data on corporate stocks. To leverage one-step-ahead asset movements across credit scores and form rating transition statistics over credit condition changes, we build 27 quarterly cohort transition matrices for 7 separate industries using rolling-average flow rates of migration probabilities. By using historical average transition probabilities, we account for an underlying, discrete-time estimate of cumulative change in credit worthiness over a given horizon with a standard normal distribution. Finally, an algorithm allocates assets periodically and new investment tactics take over across different ranking groups. We believe that this is the first work that employs evidence of credit rating transition probabilities to build upon the FF asset price literature.
