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Exploring rating shopping for european triple a senior structured finance securities

Author

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  • Fabozzi, Frank J.
  • Nawas, Mike E.
  • Vink, Dennis

Abstract

In much of the research with respect to the use of credit ratings, the notion of rating shopping features prominently. One form of rating shopping predicts that investors price the risk that arises when securities have fewer than three ratings. Inconsistent with what rating shopping would predict, our study shows that for the largest European structured finance market, the triple A sector of the senior European residential mortgage-backed market prior to 2007, investors demanded a premium for more ratings. Moreover, we find that certain characteristics unique to structured finance securities that investors perceive as complex, determine whether issuers opt for a higher number of triple A ratings.

Suggested Citation

  • Fabozzi, Frank J. & Nawas, Mike E. & Vink, Dennis, 2017. "Exploring rating shopping for european triple a senior structured finance securities," Finance Research Letters, Elsevier, vol. 20(C), pages 35-39.
    • Handle: RePEc:eee:finlet:v:20:y:2017:i:c:p:35-39
    DOI: 10.1016/j.frl.2016.08.013
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    References listed on IDEAS

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    1. Patrick Bolton & Xavier Freixas & Joel Shapiro, 2012. "The Credit Ratings Game," Journal of Finance, American Finance Association, vol. 67(1), pages 85-112, February.
    2. Emmanuel Farhi & Josh Lerner & Jean Tirole, 2013. "Fear of rejection? Tiered certification and transparency," RAND Journal of Economics, RAND Corporation, vol. 44(4), pages 610-631, December.
    3. John M. Griffin & Jordan Nickerson & Dragon Yongjun Tang, 2013. "Rating Shopping or Catering? An Examination of the Response to Competitive Pressure for CDO Credit Ratings," The Review of Financial Studies, Society for Financial Studies, vol. 26(9), pages 2270-2310.
    4. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    5. Mitchell A. Petersen, 2009. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," The Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 435-480, January.
    6. Jie (Jack) He & Jun (Qj) Qian & Philip E. Strahan, 2012. "Are All Ratings Created Equal? The Impact of Issuer Size on the Pricing of Mortgage-Backed Securities," Journal of Finance, American Finance Association, vol. 67(6), pages 2097-2137, December.
    7. Frank J. Fabozzi & Dennis Vink, 2015. "The information content of three credit ratings: the case of European residential mortgage-backed securities," The European Journal of Finance, Taylor & Francis Journals, vol. 21(3), pages 172-194, February.
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    Cited by:

    1. Vink, Dennis & Nawas, Mike & van Breemen, Vivian, 2021. "Security design and credit rating risk in the CLO market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 72(C).
    2. Vink, Dennis & Nawas, Mike & van Breemen, Vivian, 2021. "Security design and credit rating risk in the CLO market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 72(C).
    3. Karimov, Nodirbek & Kara, Alper & Downing, Gareth & Marqués-Ibáñez, David, 2024. "The impact of regulatory changes on rating behaviour," Working Paper Series 2920, European Central Bank.

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    More about this item

    Keywords

    Credit ratings; Europe; Credit rating agencies; Residential mortgage-backed securities; Structured finance;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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