Credit ratings and structured finance

Josephson, Jens and Shapiro, Joel (2015) Credit ratings and structured finance. Working Paper.

Abstract

The poor performance of credit ratings on structured finance products has prompted investigation into the role of Credit Rating Agencies (CRAs) in designing and marketing these products. We analyze a two-period reputation model where a CRA both designs and rates securities that are sold to different clienteles: unconstrained investors and investors constrained by minimum quality requirements. When quality requirements for constrained investors are higher, rating inflation increases. Rating inflation decreases if the quality of the asset pool is higher. Securities for both types of investors may have inflated ratings. The motivation for pooling assets derives from tailoring to clienteles and from reputational incentives.

Item Type: Other Working Paper
Keywords: Credit rating agencies, reputation, structured finance, finance
Subject(s): Finance
Date Deposited: 25 Sep 2015 15:04
Last Modified: 27 Feb 2017 14:06
Funders: not applicable
URI: http://eureka.sbs.ox.ac.uk/id/eprint/5518

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