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Lenders, risk insurers and rating agencies
Published in Hakan Şahin, Host Government Agreements and the Law in the Energy Sector, 2018
Several credit rating agencies, including Standard & Poor’s (S&P), Moody’s and Fitch, play a significant role in financial markets. They analyse and evaluate the default risk of lending to corporate and sovereign borrowers.89 Conducting assessments of debt ratings is traditionally within the scope of the rating agencies. Credit ratings are carried out for debt issues and take into account the borrower’s default risk, the nature of the debt obligation, the protection that the issue affords of the debt obligation, the projection that the issue affords, and its relative position in bankruptcy.90Furthermore, ratings are also available for project-specific financing. Rating for a specific project financing is relatively new but is a rapidly growing area.91 Project ratings are provided by the rating agencies with the aim of assessing and expressing as a value the level of certainty with which the project finance lenders can expect to obtain timely reimbursement of principle and payment of interest, in accordance with the project terms.92 This type of rating mainly concentrates on the capability of the financing entity, whether a developer or SPV, to make timely repayment of principle and interest to bondholders.93 Previously, rating agencies delivered their own verdict on the debt rating for a specific project; in doing so they took into consideration the following factors.
A countermeasure designed to restrain self-serving behavior and strategic rating disclosure of credit rating agencies
Published in Journal of Management Analytics, 2023
Kittiphod Charoontham, Jirawat Worakantak, Kessara Kanchanapoom, Nartraphee Tancho
The increasing complexity of financial markets and structured products has had a profound effect on the financial services industry. This intricacy increases the information asymmetry between issuers and investors on the underlying asset quality of securities. For instance, asymmetric information regarding loan quality plays a crucial role in the pricing of bank loans, with loan costs rising as information asymmetries increase (Chong et al., 2017). Consequently, asymmetric knowledge about loan qualities is the cause of the 2008 financial crisis, which has presented analytical challenges to financial experts and regulators attempting to devise a method to prevent future crises (Polimenis & Neokosmidis, 2014). Credit rating agencies (CRAs), which hold the skill of professional risk assessment, function as information certifiers by issuing credit ratings to reduce information asymmetry and promote economic progress. Credit ratings evaluate the quantitative and qualitative risks posed by issuing corporations, institutions, or governments. This causes market participants (investors, issuers, authority regulators, etc.) to gradually rely more on ratings for investment decisions, corporate finance, and risk management. Even though ratings are merely an opinion regarding the creditworthiness of issuers or rated businesses, market participants perceive that ratings provide superior information to public information alone (Liu & Thakor, 1984). Several studies are revealing the effects of ratings on the capital market. For example, corporates consider credit ratings when determining their capital structure (Kemper & Rao, 2013) and investment level (Chernenko & Sunderam, 2011). In addition, credit ratings have an influence on firms’ information disclosure policies (Chernenko & Sunderam, 2011). Consequently, CRAs have had a crucial impact on market participants in making informed decisions. They have a significant potential to improve market efficiency by issuing accurate ratings that help mitigate information asymmetries in the financial market.
Research on Financial Field Integrating Artificial Intelligence: Application Basis, Case Analysis, and SVR Model-Based Overnight
Published in Applied Artificial Intelligence, 2023
Risk measurement is a fundamental aspect of risk management, and various quantitative methods are used to quantify and assess different types of risks. Some commonly used quantitative measures for risk assessment include: Value at Risk (VaR): VaR is a statistical measure that estimates the maximum potential loss within a specific confidence level over a given time horizon. It quantifies the potential downside risk by providing a numerical estimate of the amount that an investment or portfolio could lose under adverse market conditions.Expected Shortfall (ES): Also known as Conditional Value at Risk (CVaR), ES represents the average expected loss beyond the VaR level. It provides a measure of the severity of losses in the tail of the distribution and offers additional information beyond VaR.Standard Deviation: Standard deviation is a measure of the dispersion or volatility of returns. It quantifies the extent to which individual observations within a dataset deviate from the mean. Higher standard deviation indicates higher volatility and, consequently, higher risk.Beta: Beta is a measure of systematic risk or market risk associated with an investment relative to the overall market. It represents the sensitivity of an asset’s returns to changes in the market returns. A beta greater than 1 indicates higher volatility compared to the market, while a beta less than 1 indicates lower volatility.Credit Ratings: Credit rating agencies assign numerical ratings to assess the creditworthiness and default risk of debt issuers. These ratings range from high-quality (e.g., AAA) to low-quality (e.g., D) and provide an indication of the level of credit risk associated with an investment.Sharpe Ratio: The Sharpe ratio measures the risk-adjusted return of an investment by considering the excess return earned relative to the risk-free rate per unit of total risk. A higher Sharpe ratio indicates a more favorable risk-return trade-off.