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How much do Investors Rely on Credit Ratings: Empirical evidence from the U.S. and E.U. CLO primary market

Author

Listed:
  • Frank Fabozzi

    (EDHEC Risk Institute, France)

  • Vivian M. Breemen

    (Nyenrode Business Universiteit, The Netherlands)

  • Dennis Vink

    (Nyenrode Business Universiteit, The Netherlands)

  • Mike Nawas

    (Nyenrode Business Universiteit, The Netherlands)

  • Austin Gengos

    (Gamut Capital Management, United States)

Abstract

We investigate the extent to which investors rely on credit ratings and other factors beyond credit ratings in determining the funding cost for collateralized loan obligations (CLOs) tranches in the period 1997-2015. We find significant differences between the United States (U.S.) and European Union (E.U.) markets. In the U.S., we find a much higher and more consistent degree of reliance on credit ratings and other factors in pricing CLOs over time compared to the E.U. market. Finally, we find that investors in both markets reduce, rather than increase, funding costs when rating standards loosened. The implications for market practices are discussed.

Suggested Citation

  • Frank Fabozzi & Vivian M. Breemen & Dennis Vink & Mike Nawas & Austin Gengos, 2023. "How much do Investors Rely on Credit Ratings: Empirical evidence from the U.S. and E.U. CLO primary market," Journal of Financial Services Research, Springer;Western Finance Association, vol. 63(2), pages 221-247, April.
    • Handle: RePEc:kap:jfsres:v:63:y:2023:i:2:d:10.1007_s10693-021-00372-x
    DOI: 10.1007/s10693-021-00372-x
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    References listed on IDEAS

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