Rating Inflation versus Deflation: On Procyclical Credit Ratings

Yongmin Chen, Dingwei Gu and Zhiyong Yao ()

MPRA Paper from University Library of Munich, Germany

Abstract: Credit rating agencies play a crucial role in financial markets. There are two competing views regarding their behavior: some argue that they engage in rating inflation, while others suggest that they deflate ratings. This article offers a rationale that reconciles the two opposite arguments. We find that both rating inflation and rating deflation can occur in equilibrium. Furthermore, we show that credit rating is procyclical: rating inflation is more likely to happen in a boom while rating deflation is more likely to happen in a recession.

Keywords: rating inflation; rating deflation; procyclical rating (search for similar items in EconPapers)
JEL-codes: D82 G10 G24 (search for similar items in EconPapers)
Date: 2013-11-02
New Economics Papers: this item is included in nep-cba, nep-cta, nep-mac and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/51159/1/MPRA_paper_51159.pdf original version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:51159

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().