Do investors care about credit ratings? An analysis through the cycle

Giuliano Iannotta, Giacomo Nocera () and Andrea Resti
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Giacomo Nocera: Audencia Recherche - Audencia Business School

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Abstract: We investigate how the credit cycle affects the link between bond spreads and credit ratings. Using a simple model of the credit assessment process, we show that when the debt market is more opaque, the information content of ratings deteriorates, creating an incentive for investors to increase the amount spent on private information. We test this hypothesis empirically. Results show that when market opaqueness (proxied by the spread between Aaa- and Baa-rated bonds) increases, the explanatory power of ratings and other control variables deteriorates as investors increasingly price in non-public information.

Keywords: Bond; Credit spread; Rating; Opaqueness (search for similar items in EconPapers)
Date: 2013
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Published in Journal of Financial Stability, 2013, 9 (4), pp.545-555. ⟨10.1016/j.jfs.2012.11.006⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00840576

DOI: 10.1016/j.jfs.2012.11.006

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