Can accounting-based and market-based indicators predict changes in the risk rating of brazilian banks?

Abstract

Purpose-This work aims to analyze whether market indicators, in complementarity to accounting indicators, have the ability to anticipate changes (upgrades or downgrades) in the assessments of risk rating (rating) of banks in Brazil. Design/methodology/approach-We used information based on the merger of two databases, Economatica and Standard & Poor's/Fitch, from 2010 to 2014, and linear regressions based on probit models. Findings-Our results show that market-based indicators as Sovereign Risk and GDP growth, together with accounting-based indicators as asset quality, liquidity, risk, capital and profitability, have predictive power for risk rating changes of banks in Brazil. The results still show that the market did not price changes in Brazilian banks' ratings in windows ending in the event date. Such evidence suggest that Sovereign Risk and economic-systemic factors can be used to proxy for risk in volatile markets with high uncertainty. Originality/value-Unlike in developed countries, the Brazilian stock market, young and not very representative of the economy, was not able to anticipate changes in the banks' rating. This study anticipates information to investors who aid in the decision to buy, hold or sell securities, and signals that the financial system is more susceptible to macroeconomic shocks in unstable economies.

The role of banking supervision in credit risk disclosures and loan loss provisions

“…Therefore, we expect a positive impact of ΔLOANS on the level of disclosure. GDP is the annual growth rate of the gross domestic product for each country and is used as a proxy of economic growth (Anandarajan et al, 2007) and changes in risk ratings García, Monte-Mor and Tardin (2019). DSSM is a dummy variable that equals one for the period between 2014 and 2015, which is the period after the launch of the SSM.…”

An Endogenous Feedback and Entropy Analysis in Machine Learning Model for Stock’s Return Forecast

“…Such discussion has the potential to empirically contribute to the literature, concerning the behavior analysis of asset returns forecast. This applies especially in countries with volatile financial markets, as advocated by [9], which are subjected to political-economic uncertainties and frequent changes in the rating, as seen in Brazil. Furthermore, with our work, it will be possible to outline a strategy capable of predicting the future return of the asset.…”