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Asset pricing, asymmetric information and rating announcements: does benchmarking on ratings matter?

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  • Spyros Pagratis

Abstract

Using an intertemporal model of asset pricing under asymmetric information, we demonstrate how public ratings about the quality of a risky asset could enhance information efficiency, albeit at a cost of higher asset price volatility. The analysis also draws implications for the use of ratings for benchmarking purposes, in particular, ratings-based capital requirements and an investment/subinvestment grade dichotomy depending on the rating of the asset. In this situation, allowing a class of market participants (eg pension funds) to hold an asset only if its rating exceeds a certain threshold may lead informed traders to overreact to news about fundamentals. In this case, ratings induce lower price efficiency and excessive asset price volatility.

Suggested Citation

  • Spyros Pagratis, 2005. "Asset pricing, asymmetric information and rating announcements: does benchmarking on ratings matter?," Bank of England working papers 265, Bank of England.
    • Handle: RePEc:boe:boeewp:265
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    File URL: http://www.bankofengland.co.uk/research/Documents/workingpapers/2005/WP265.pdf
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    References listed on IDEAS

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    Cited by:

    1. Grothe, Magdalena, 2013. "Market pricing of credit rating signals," Working Paper Series 1623, European Central Bank.
    2. Deb, Pragyan & Manning, Mark & Murphy, Gareth & Penalver, Adrian & Toth, Aron, 2011. "Financial Stability Paper No 9: Whither the Credit Ratings Industry?," Bank of England Financial Stability Papers 9, Bank of England.
    3. Donato Masciandaro, 2013. "Sovereign debt: financial market over-reliance on credit rating agencies," BIS Papers chapters, in: Bank for International Settlements (ed.), Sovereign risk: a world without risk-free assets?, volume 72, pages 50-62, Bank for International Settlements.

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