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Market dynamics associated with credit ratings - a literature review

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  • Fernando Gonzalez
  • François Haas
  • Ronald Johannes
  • Mattias Persson
  • Liliana Toledo
  • Roberto Violi
  • Martin Wieland
  • Carmen Zins

Abstract

This paper investigates the potential impact of the growing influence of the opinions of credit rating agencies (CRAs) on market dynamics. This impact can be seen as a consequence of the information content of the ratings themselves or indirectly as a consequence of the "hardwiring" of ratings into regulatory rules, management mandates, bond covenants, etc. Rating agencies who strive to provide credit assessments that remain broadly stable through the course of the business cycle have been themselves affected as the growing reliance on rating mean that they are increasingly expected to satisfy a widening range of constituencies with different and sometimes conflicting interests. They have responded to this challenge largely by adding more products to their traditional product palette but also through modifications in the rating process. It is however too early to say whether these changes mean a fundamental shift in their approach to credit risk measurement.

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Bibliographic Info

Paper provided by European Central Bank in its series Occasional Paper Series with number 16.

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Length: 40 pages
Date of creation: Jun 2004
Date of revision:
Handle: RePEc:ecb:ecbops:20040016

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Keywords: credit rating agencies; ratings; market dynamics; rating triggers; rating methodologies.;

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References

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  1. Doron Kliger & Oded Sarig, 2000. "The Information Value of Bond Ratings," Journal of Finance, American Finance Association, American Finance Association, vol. 55(6), pages 2879-2902, December.
  2. Hand, John R M & Holthausen, Robert W & Leftwich, Richard W, 1992. " The Effect of Bond Rating Agency Announcements on Bond and Stock Prices," Journal of Finance, American Finance Association, American Finance Association, vol. 47(2), pages 733-52, June.
  3. Caton, Gary L & Goh, Jeremy, 2003. " Are All Rivals Affected Equally by Bond Rating Downgrades?," Review of Quantitative Finance and Accounting, Springer, Springer, vol. 20(1), pages 49-62, January.
  4. Eva Catarineu-Rabell & Patricia Jackson & Dimitrios Tsomocos, 2005. "Procyclicality and the new Basel Accord - banks’ choice of loan rating system," Economic Theory, Springer, Springer, vol. 26(3), pages 537-557, October.
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  15. Holthausen, Robert W. & Leftwich, Richard W., 1986. "The effect of bond rating changes on common stock prices," Journal of Financial Economics, Elsevier, Elsevier, vol. 17(1), pages 57-89, September.
  16. Lando, David & Skodeberg, Torben M., 2002. "Analyzing rating transitions and rating drift with continuous observations," Journal of Banking & Finance, Elsevier, Elsevier, vol. 26(2-3), pages 423-444, March.
  17. Geske, Robert, 1977. "The Valuation of Corporate Liabilities as Compound Options," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 12(04), pages 541-552, November.
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  19. Til Schuermann & Yusuf Jafry, 2003. "Measurement and Estimation of Credit Migration Matrices," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 03-08, Wharton School Center for Financial Institutions, University of Pennsylvania.
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