Credit Ratings vs. Market Pricing


(Special Posting by Dimensional Fund Advisors)

In the highly competitive financial markets, most "news" has already been incorporated into prices. Dimensional takes advantage of the information embedded in prices, rather than relying on third parties rating services.

Like the equity market, the fixed income market prices in information about credit risk
instantaneously. This makes it extremely difficult for credit ratings agencies to adjust their ratings in a way that fully reflects the markets' perception of risk.

Moody's downgrade of fifteen major banks may have been presented to the general public as significant news, but the lowered ratings had been factored in by the market well in advance of the official statement. Having fallen before the announcement, bank shares and bond prices rallied afterward. The dynamic nature of market pricing is why Dimensional always considers market prices when making its investment decisions, rather than relying on third-party assessments.

Read Dimensional's Explanation HERE.