Believe Only What You See: Credit Rating Agencies, Structured Finance, and Bonds

Elamin, Mahmoud

doi:10.2139/ssrn.1852650

Cited by 1 publication

(6 citation statements)

References 0 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…The equilibrium concept I use is the Perfect Public Equilibrium (PPE) 4 . To make the game interesting, I assume the investor still invests some of his endowment in the bad project, even when the the CRA is accessed.…”

Section: Equilibrium Characterizationmentioning

confidence: 99%

“…The following Lemmas pin down investors' optimal strategies given these beliefs. The proofs for these Lemmas can be found in [4]. This paper and [4] differ in the way the beliefs are formed.…”

Section: Equilibrium Characterizationmentioning

confidence: 99%

“…I only discuss some of the earlier papers here: [1] discussed problems with rating timeliness, [2] discussed the "Credit Rating Crisis", and [3] discussed the economics behind CDOs and showed problems with the CRA's models. Theoretical models discussing these problems included [4] and [5], among others. [6] is a recent literature review of relevant topics pertaining to this business.…”

Section: Introductionmentioning

confidence: 99%

“…But since the financial crisis revealed an across-the-board failure in rating a whole class of assets-structured finance assets-confidence in the CRAs' ability to rate these products was severely damaged. [4] identified a key feature of structured finance products: Their ratings are effectively unverifiable relative to bond ratings. It showed that because of unverifiability, an equilibrium where CRAs fully reveal their information does not exist.…”

Section: Introductionmentioning

confidence: 99%

“…It showed that because of unverifiability, an equilibrium where CRAs fully reveal their information does not exist. This paper builds on the unverifiable ratings model of [4], and introduces reputation as in [7] and [8]. I evaluate whether the CRA's fear to lose its reputation is potent enough to deter it from misrating structured finance products.…”

Section: Introductionmentioning

confidence: 99%

See 4 more Smart Citations

Can Reputation Ensure Efficiency in the Structured Finance Market?

Elamin

2017

TEL

Self Cite

View full text Add to dashboard Cite

Structured finance products are opaque and their ratings are unverifiable. Therefore, a credit rating agency (CRA) cannot credibly fully reveal its information about the quality of a rated structured finance project. Can reputation discipline the CRA? I introduce incomplete information about the CRA's type: With some probability, it is a truthful type that always fully reveals its information. The (updated) probability that the CRA is truthful is its reputation. With only two project types and when the CRA's reputation is high enough, an informationally-efficient equilibrium, where investors are fully informed, exists. If firms know the true CRA type however, this existence result fails. Moreover, with more than two project types, no matter how high the CRA's patience level or its reputation, there is no informationally-efficient equilibrium. The many project types case is clearly the relevant case. Therefore, I conclude that the fear to lose reputation is not enough deterrent in the structured finance market.

show abstract

Section: Equilibrium Characterizationmentioning

confidence: 99%

Section: Equilibrium Characterizationmentioning

confidence: 99%