NEW YORK, May 7, 2012 /PRNewswire/ -- A company's credit metrics may have a high correlation to its equity returns, according to a report issued today by S&P Capital IQ, a leader in multi-asset class market research, data solutions and portfolio risk analytics. The report, Cross-Asset Update: Credit Metrics Linked To Equity Performance and written by S&P Capital IQ Solutions Architects, James Elder and Joshua Mintz, also suggests a strong relationship between share price and improvement in financial management. A copy of Cross-Asset Update can be found here.
The S&P Capital IQ Solutions Architects team analyzed historical equity performance with credit indicators to determine if correlation between these metrics existed over one, three, and five years. According to Elder and Mintz, improvements in the S&P Capital IQ CreditModel ® quantitative credit scores correlated positively with equity prices. Similarly, deteriorations in probability of default (PD) scores correlated negatively with equity prices. Most notably, as mentioned in the report, three notch positive changes in CreditModel scores corresponded with five year average equity returns of 90.22% and median returns of 40.20%, and three year average returns of 162.41% and median returns of 119.20%.
"The link between PDs and Equity scores are not surprising given that equity prices and volatility are components of the PD model used. The CreditModel results were particularly interesting because CreditModel does not incorporate market inputs yet the market appears to have recognized improvement in financial management." says Elder.
In developing this report, Elder, Mintz and the Solutions Architects team used proprietary S&P Capital IQ data, technology, and expertise to identify and understand cross-asset trends affecting key players in the market. The first section highlights broad trends for companies analyzed within the S&P 500 ®. The second section looks at these trends by GICS ® sector and then by CreditModel score categories. Finally, the third section uncovers that larger improvements in CreditModel scores correspond to larger improvements in equity performance.Cross-Asset Update is part of an ongoing series of analytical reports provided by the Solutions Architects team of S&P Capital IQ and made available over S&P Capital IQ Global Credit Portal ® and standardandpoors.com. About Solutions Architects S&P Capital IQ's Solutions Architects are an independent team of global finance professionals who, using a mix of market data and proprietary S&P Capital IQ research and analytics, develop custom solutions for institutional clients and wealth managers around the world. With an emphasis on discovering opportunities for increasing alpha generation while reducing risk, the team regularly publishes articles and insights, providing timely market observations and trends analysis across asset classes, sectors and geographical regions.
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