An equilibrium model of credit rating agencies

Steinar Holden, Gisle Natvik and Adrien Vigier
Additional contact information
Adrien Vigier: University of Oslo

No 2012/23, Working Paper from Norges Bank

Abstract: We develop a model of credit rating agencies (CRAs) based on reputation concerns. Ratings affect 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 find that CRAs have a pro-cyclical impact on default risk: in a liquidity 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 standards tend to be pro-cyclical, while biased CRA-incentives will ultimately be selfdefeating.

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: 31 pages
Date: 2012-12-18
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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https://www.norges-bank.no/en/news-events/news-pub ... pers/2012/WP-201223/

Related works:
Working Paper: An Equilibrium Model of Credit Rating Agencies (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:bno:worpap:2012_23

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