Credit ratings: a new objective method using the rasch Model: the case of consumer discretionary

The purpose of this paper is to understand if the Rasch model can be applied to mimic the credit ratings and can help to develop a simple and objective way to evaluate the creditworthiness of companies and their financial obligations. The research is based on existing data selected with the support of several researches underlined in the paper, but applying the Rasch model to this data has never been done yet in this field. The credit ratings grades for the consumer discretionary, sector of the S&P were estimated using the Rasch model for period from 2004 to 2014. The paper shows that the Rasch model can be applied to estimate a company’s credit rating. The model was successfully applied to the Consumer Discretionary sector, where the measures estimated correlate with those of the Bloomberg default risk. Moreover we found that the credit ratings measured by Rasch model are statistically significant in predicting the sign of the stock return, once other rating information, such as Bloomberg default risk, has been taken in account. This paper offers a new approach to credit rating that should be further explored in future researches.