Ratings Shopping and Asset Complexity: A Theory of Ratings Inflation / Vasiliki Skreta, Laura Veldkamp.

Format:

Book

Author/Creator:

Skreta, Vasiliki.

Contributor:

National Bureau of Economic Research.

Veldkamp, Laura.

Series:

Working Paper Series (National Bureau of Economic Research) no. w14761.

NBER working paper series no. w14761

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Ratings Shopping and Asset Complexity

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2009.

Summary:

Many identify inflated credit ratings as one contributor to the recent financial market turmoil. We develop an equilibrium model of the market for ratings and use it to examine possible origins of and cures for ratings inflation. In the model, asset issuers can shop for ratings -- observe multiple ratings and disclose only the most favorable -- before auctioning their assets. When assets are simple, agencies' ratings are similar and the incentive to ratings shop is low. When assets are sufficiently complex, ratings differ enough that an incentive to shop emerges. Thus, an increase in the complexity of recently-issued securities could create a systematic bias in disclosed ratings, despite the fact that each ratings agency produces an unbiased estimate of the asset's true quality. Increasing competition among agencies would only worsen this problem. Switching to an investor-initiated ratings system alleviates the bias, but could collapse the market for information.

Notes:

Print version record

February 2009.