Credit ratings are classified according to their time horizon and metric precision: Through-the-Cycle (TTC) vs. Point-in-Time (PIT):
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Through-the-Cycle (TTC) vs. Point-in-Time (PIT)
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Cardinal vs. Ordinal Risk Measures
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- TTC are designed for buy-and-hold investing. PIT should be used for repo/sales/trading.
- TTC are designed for corporate credits, which are static. PIT should be used on structured securities, which are dynamic exposures.
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- Alphanumeric ratings are based on either a numerical or an ordinal scale.
- Intervals on an alphanumeric scale have a verifiable meaning.
- Intervals on ordinal scales reflect the user’s sense of relative risk.
- The objective meaning is “percentage defaults” or “expected loss.” The subjective meaning is “better” or “worse” credit quality.
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TTC work only in stable macro-economic conditions.
PIT should be used in volatile economies.
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If you do not believe NRSRO ratings reflect risk-realities, it is better to use a PIT, ordinal rating.
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