Working Paper
Believe only what you see: credit rating agencies, structured finance, and bonds
Abstract: This paper identifies rating verifiability as a key difference that explains why credit rating agencies (CRAs) failed to mitigate information asymmetries in the structured finance market but succeeded in the bond market. Two infinitely repeated models are analyzed. In the first, the rating is unverifiable, and there is no equilibrium where the CRA reveals its information. In the second, the rating is verified with some probability, and full information revelation is guaranteed for any verification probability, when the CRA is patient enough. The interaction between verification probability and CRA patience is also analyzed.
https://doi.org/10.26509/frbc-wp-201222
Access Documents
File(s):
File format is text/html
https://doi.org/10.26509/frbc-wp-201222
Description: Persistent Link
File(s):
File format is application/pdf
https://www.clevelandfed.org/-/media/project/clevelandfedtenant/clevelandfedsite/publications/working-papers/2012/wp-1222-believe-only-what-you-see-credit-rating-agencies-structured-finance-and-bonds-pdf.pdf
Description: Full Text
Authors
Bibliographic Information
Provider: Federal Reserve Bank of Cleveland
Part of Series: Working Papers (Old Series)
Publication Date: 2012
Number: 1222