Credit rating dynamics and competition

Stefan Hirth

Journal of Banking & Finance, 2014, vol. 49, issue C, 100-112

Abstract: I analyze the market for credit ratings with competition between more than two rating agencies. How can honest rating behavior be achieved, and under which conditions can a new honest rating agency successfully invade a market with inflating incumbents? My model predicts cyclic dynamics if sophisticated investors have a high impact on agencies’ reputation. In contrast, if trusting investors have the main impact, then the dynamics exhibits a saddle point rather than cycles. In this case, regulatory support for honest rating agencies is only needed for a limited time, but the effect is sustainable in the long run.

Keywords: Credit rating agencies; Ratings inflation; Evolutionary game theory (search for similar items in EconPapers)
JEL-codes: D43 D82 G24 L15 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:49:y:2014:i:c:p:100-112

DOI: 10.1016/j.jbankfin.2014.08.011

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