Are All Ratings Created Equal? The Impact of Issuer Size on the Pricing of Mortgage-backed Securities
AbstractWe examine whether rating agencies (Moody’s, S&P, and Fitch) reward large issuers of mortgage-backed securities, who bring substantial business, by granting them unduly favorable ratings. The initial yield on both AAA-rated and non-AAA rated tranches sold by large issuers is higher than that on similar tranches sold by small issuers during the market boom years of 2004-2006. Moreover, the prices of MBS sold by large issuers drop more than those sold by small issuers, and the differences are concentrated among tranches issued during 2004-2006. We conclude that large issuers receive more favorable ratings and that the market prices the risk of inflated ratings, especially during booming periods.
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Date of creation: Jul 2011
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Find related papers by JEL classification:
- G01 - Financial Economics - - General - - - Financial Crises
- G2 - Financial Economics - - Financial Institutions and Services
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-08-02 (All new papers)
- NEP-BAN-2011-08-02 (Banking)
- NEP-BEC-2011-08-02 (Business Economics)
- NEP-URE-2011-08-02 (Urban & Real Estate Economics)
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