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Credit rating dynamics and competition

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  • Hirth, Stefan

Abstract

I analyze the market for credit ratings with competition between more than two rating agencies. How can honest rating behavior be achieved, and under which conditions can a new honest rating agency successfully invade a market with inflating incumbents? My model predicts cyclic dynamics if sophisticated investors have a high impact on agencies’ reputation. In contrast, if trusting investors have the main impact, then the dynamics exhibits a saddle point rather than cycles. In this case, regulatory support for honest rating agencies is only needed for a limited time, but the effect is sustainable in the long run.

Suggested Citation

  • Hirth, Stefan, 2014. "Credit rating dynamics and competition," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 100-112.
  • Handle: RePEc:eee:jbfina:v:49:y:2014:i:c:p:100-112
    DOI: 10.1016/j.jbankfin.2014.08.011
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Marta Allegra Ronchetti, 2018. "What if I knew you did it? An analysis of preliminary ratings’ disclosure under competition," Discussion Papers 2018/09, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    2. repec:sgm:resrep:v:2:i:22:y:2016:p:48-59 is not listed on IDEAS
    3. repec:oup:revfin:v:21:y:2017:i:2:p:465-509. is not listed on IDEAS
    4. Jean Paul Rabanal & Olga A Rud, 2018. "Does Competition Affect Truth Telling? An Experiment with Rating Agencies," Review of Finance, European Finance Association, vol. 22(4), pages 1581-1604.
    5. Matthias Efing, 2012. "Bank Capital Regulation with an Opportunistic Rating Agency," Swiss Finance Institute Research Paper Series 12-19, Swiss Finance Institute.
    6. Michael R King & Steven Ongena & Nikola Tarashev, 2016. "Bank standalone credit ratings," BIS Working Papers 542, Bank for International Settlements.

    More about this item

    Keywords

    Credit rating agencies; Ratings inflation; Evolutionary game theory;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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