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Believe only what you see: credit rating agencies, structured finance, and bonds

  • Mahmoud Elamin

This paper identifies rating verifiability as a key difference that explains why credit rating agencies (CRAs) failed to mitigate information asymmetries in the structured finance market but succeeded in the bond market. Two infinitely repeated models are analyzed. In the first, the rating is unverifiable, and there is no equilibrium where the CRA reveals its information. In the second, the rating is verified with some probability, and full information revelation is guaranteed for any verification probability, when the CRA is patient enough. The interaction between verification probability and CRA patience is also analyzed.

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Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 1222.

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Date of creation: 2012
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Handle: RePEc:fip:fedcwp:1222
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  1. Richard Cantor & Frank Packer, 1994. "The credit rating industry," Quarterly Review, Federal Reserve Bank of New York, issue Sum, pages 1-26.
  2. Patrick Bolton & Xavier Freixas & Joel Shapiro, 2009. "The Credit Ratings Game," NBER Working Papers 14712, National Bureau of Economic Research, Inc.
  3. Carlson Mark & Hale Galina B, 2006. "Rating Agencies and Sovereign Debt Rollover," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(2), pages 1-32, September.
  4. Lawrence J. White, 2010. "Markets: The Credit Rating Agencies," Journal of Economic Perspectives, American Economic Association, vol. 24(2), pages 211-26, Spring.
  5. Mailath, George J. & Samuelson, Larry, 2006. "Repeated Games and Reputations: Long-Run Relationships," OUP Catalogue, Oxford University Press, number 9780195300796, March.
  6. Efraim Benmelech & Jennifer Dlugosz, 2010. "The Credit Rating Crisis," NBER Chapters, in: NBER Macroeconomics Annual 2009, Volume 24, pages 161-207 National Bureau of Economic Research, Inc.
  7. Mathis, Jérôme & McAndrews, James & Rochet, Jean-Charles, 2009. "Rating the raters: Are reputation concerns powerful enough to discipline rating agencies?," Journal of Monetary Economics, Elsevier, vol. 56(5), pages 657-674, July.
  8. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, June.
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