Believe only what you see: credit rating agencies, structured finance, and bonds

Mahmoud Elamin

No 1222, Working Papers (Old Series) from Federal Reserve Bank of Cleveland

Abstract: This paper identifies rating verifiability as a key difference that explains why credit rating agencies (CRAs) failed to mitigate information asymmetries in the structured finance market but succeeded in the bond market. Two infinitely repeated models are analyzed. In the first, the rating is unverifiable, and there is no equilibrium where the CRA reveals its information. In the second, the rating is verified with some probability, and full information revelation is guaranteed for any verification probability, when the CRA is patient enough. The interaction between verification probability and CRA patience is also analyzed.

Keywords: Financial institutions; Uncertainty (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedcwp:1222

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DOI: 10.26509/frbc-wp-201222

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