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Market Structure and Rating Strategies in Credit Rating Markets : A Dynamic Model with Matching of Heterogeneous Bond Issuers and Rating Agencies

Fischer, Thomas LU (2015) In Journal of Banking & Finance 58. p.39-56
Abstract
This paper investigates the impact of rating agencies in a market with asymmetric information. In particular, the role of credit rating agencies as an intermediary between investors and bond issuers is discussed. We model this setting in a dynamic framework in which both rating agencies and bond issuers are of heterogeneous quality. Rating agencies can apply costly research technology to reveal the fundamental nature of bond issuers and engage in rating smoothing. We show that rating smoothing can compensate for low research quality, even though it is accompanied by a quality deterioration in the rating market and market clustering. Moreover, low-quality bond issuers have a general tendency to match with low-quality rating agencies. If... (More)
This paper investigates the impact of rating agencies in a market with asymmetric information. In particular, the role of credit rating agencies as an intermediary between investors and bond issuers is discussed. We model this setting in a dynamic framework in which both rating agencies and bond issuers are of heterogeneous quality. Rating agencies can apply costly research technology to reveal the fundamental nature of bond issuers and engage in rating smoothing. We show that rating smoothing can compensate for low research quality, even though it is accompanied by a quality deterioration in the rating market and market clustering. Moreover, low-quality bond issuers have a general tendency to match with low-quality rating agencies. If investors place a strong emphasis on the reputation of rating agencies, rating markets also tend to be strongly clustered. (Less)
Please use this url to cite or link to this publication:
author
publishing date
type
Contribution to journal
publication status
published
subject
keywords
rating agencies, rating smoothing, market structure, G24, D83, C63, L11, L14
in
Journal of Banking & Finance
volume
58
pages
18 pages
publisher
Elsevier
external identifiers
  • scopus:84934876552
ISSN
1872-6372
DOI
10.1016/j.jbankfin.2015.03.010
language
English
LU publication?
no
id
d8fbf7f0-04ab-4810-9d03-99cdde0320db
date added to LUP
2017-01-10 10:45:30
date last changed
2017-10-29 04:56:25
@article{d8fbf7f0-04ab-4810-9d03-99cdde0320db,
  abstract     = {This paper investigates the impact of rating agencies in a market with asymmetric information. In particular, the role of credit rating agencies as an intermediary between investors and bond issuers is discussed. We model this setting in a dynamic framework in which both rating agencies and bond issuers are of heterogeneous quality. Rating agencies can apply costly research technology to reveal the fundamental nature of bond issuers and engage in rating smoothing. We show that rating smoothing can compensate for low research quality, even though it is accompanied by a quality deterioration in the rating market and market clustering. Moreover, low-quality bond issuers have a general tendency to match with low-quality rating agencies. If investors place a strong emphasis on the reputation of rating agencies, rating markets also tend to be strongly clustered.},
  author       = {Fischer, Thomas},
  issn         = {1872-6372},
  keyword      = {rating agencies,rating smoothing,market structure,G24,D83,C63,L11,L14},
  language     = {eng},
  pages        = {39--56},
  publisher    = {Elsevier},
  series       = {Journal of Banking & Finance},
  title        = {Market Structure and Rating Strategies in Credit Rating Markets : A Dynamic Model with Matching of Heterogeneous Bond Issuers and Rating Agencies},
  url          = {http://dx.doi.org/10.1016/j.jbankfin.2015.03.010},
  volume       = {58},
  year         = {2015},
}