Livin’ on the Edge with Ratings: Liquidity, Efficiency and Stability

Jonathan Chiu and Thorsten Koeppl

No 274661, Queen's Economics Department Working Papers from Queen's University - Department of Economics

Abstract: We look at the role of credit ratings when assets are issued in a primary market and sold by dealers into a secondary, over-the-counter market in order to study regulatory proposals for rating agencies. Credit ratings are used to overcome a lemons problem. When the lemons problem is moderate, ratings are used to screen issuers, but are ineffciently inaccurate. Hence, too many lemons are issued in order for dealers to prot from rate shopping where low rating standards lead to high volume, but fragile trading in the secondary market. This ineffciency arises from dealers not properly taking into account the informational rents paid indirectly by investors in the secondary market to primary issuers. We use our framework to show that inhouse ratings by investors or competition in the secondary market can lead to more accurate ratings and more stable trading, while promoting in-house ratings by dealers and competition among rating agencies are ineffective. Holding dealers liable or having investors pay for accurate ratings ex-post can also improve effciency and stability.

Keywords: Financial; Economics (search for similar items in EconPapers)
Pages: 1335
Date: 2014-12
References: Add references at CitEc
Citations:

Downloads: (external link)
https://ageconsearch.umn.edu/record/274661/files/qed_wp_1335.pdf (application/pdf)

Related works:
Working Paper: Livin' On The Edge With Ratings: Liquidity, Efficiency And Stability (2014)
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:ags:quedwp:274661

DOI: 10.22004/ag.econ.274661

Access Statistics for this paper

More papers in Queen's Economics Department Working Papers from Queen's University - Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by AgEcon Search ().