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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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    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. Christian Siemering, 2021. "The economics of dishonest insurance companies," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 46(1), pages 1-20, March.
    3. Patrycja Chodnicka-Jaworska, 2016. "Credit Ratings Inflation Phenomenon – Are There Any Diffrences in the Credit Ratings Determinants? (Zjawisko inflacji credit ratingow – czy wystepuja roznice w determinantach credit ratingow?)," Research Reports, University of Warsaw, Faculty of Management, vol. 2(22), pages 48-59.
    4. Jess N. Cornaggia & Kimberly J. Cornaggia & John E. Hund, 2017. "Credit Ratings Across Asset Classes: A Long-Term Perspective," Review of Finance, European Finance Association, vol. 21(2), pages 465-509.
    5. Michael R. King & Steven Ongena & Nikola Tarashev, 2020. "Bank Standalone Credit Ratings," International Journal of Central Banking, International Journal of Central Banking, vol. 16(4), pages 101-144, September.
    6. 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.
    7. Xiangyun Zhou & Yixiang Tian & Ping Zhang & Xiurong Chen, 2018. "Incentive and constraint regulations of rating inflation in collusion over the separation of economic cycles - Markov rating shopping dual reputation model," PLOS ONE, Public Library of Science, vol. 13(10), pages 1-18, October.
    8. Matthias Efing, 2012. "Bank Capital Regulation with an Opportunistic Rating Agency," Swiss Finance Institute Research Paper Series 12-19, Swiss Finance Institute.

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    More about this item

    Keywords

    Credit rating agencies; Ratings inflation; Evolutionary game theory;
    All these keywords.

    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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