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Costly information transmission in continuous time with implications for credit rating announcements

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  • Wang, Hefei
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    Abstract

    This paper formulates a continuous-time information transmission model in which an altruistic sender privately observes a stochastic state variable, and incurs a communication cost when she broadcasts a message. We characterize the sender's optimal announcement strategy using an ordinary differential equation. We prove the optimality of the sender's strategies using a martingale verification argument and show that the sender's optimal strategy involves sending discrete messages. Furthermore, we apply the model to the timing decision of credit rating announcements and provide a framework to study various aspects of rating announcements, such as the probability of rating reversals and the expected time before a rating change.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

    Volume (Year): 36 (2012)
    Issue (Month): 9 ()
    Pages: 1402-1413

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    Handle: RePEc:eee:dyncon:v:36:y:2012:i:9:p:1402-1413

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    Web page: http://www.elsevier.com/locate/jedc

    Related research

    Keywords: Dynamic information transmission; Costly talk; Credit rating announcement;

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