An Equilibrium Model of Credit Rating Agencies

Steinar Holden, Gisle James Natvig (gisle-james.natvik@norges-bank.no) and Adrien Vigier
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Gisle James Natvig: Norges Bank, Postal: Bankplassen 2, 0151 Oslo, Norway
Authors registered in the RePEc Author Service: Gisle James Natvik

No 01/2013, Memorandum from Oslo University, Department of Economics

Abstract: We develop a model of credit rating agencies (CRAs) based on reputation concerns. Ratings a ect investors' choice and, thereby, also issuers' access to funding and default risk. We show that in equilibrium { the informational content of credit ratings is inferior to that of CRAs' private information. We nd that CRAs have a pro-cyclical impact on default risk: in a liq- uidity boom CRAs help resolve investors' coordination problem, and lower the probability of default; in a liquidity crunch CRAs raise the probability of default. Furthermore, rating stan- dards tend to be pro-cyclical, while biased CRA-incentives will ultimately be self-defeating.

Keywords: Credit rating agencies; global games; coordination failure (search for similar items in EconPapers)
JEL-codes: C72 D82 G24 G33 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2012-12-18
New Economics Papers: this item is included in nep-cta and nep-gth
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Working Paper: An equilibrium model of credit rating agencies (2012)
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