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Bonuses, Credit Rating Agencies and the Credit Crunch

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  • Peter Sinclair

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  • Guy Spier
  • Tom Skinner
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    Abstract

    The payment of bonuses can bring big benefits. But harm, too, can result. In the financial sector, this is especially true, above all when they are related to noisy indicators of performance over brief periods. This paper starts by exploring these ideas, then proceeds to examine credit rating agencies and their role in the 2007 credit crunch. It emphasizes the paucity of long term high frequency financial data to quantify tail event risks, the failure to apply analysis of fundamentals in financial and housing markets, and rewards structures to individual players that reinforced myopia as three key components of the crisis.

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    File URL: http://www.st-andrews.ac.uk/economics/CDMA/papers/cp0805.pdf
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    Bibliographic Info

    Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Conference Paper Series with number 0805.

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    Handle: RePEc:san:cdmacp:0805

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    Keywords: bonuses; credit crunch; credit rating agencies.;

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