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An Equilibrium Model of Credit Rating Agencies

Author

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  • Holden, Steinar

    (Dept. of Economics, University of Oslo)

  • Natvig, Gisle James

    (Norges Bank)

  • Vigier, Adrien

    (Dept. of Economics, University of Oslo)

Abstract

We develop a model of credit rating agencies (CRAs) based on reputation concerns. Ratings a ect investors' choice and, thereby, also issuers' access to funding and default risk. We show that in equilibrium { the informational content of credit ratings is inferior to that of CRAs' private information. We nd that CRAs have a pro-cyclical impact on default risk: in a liq- uidity boom CRAs help resolve investors' coordination problem, and lower the probability of default; in a liquidity crunch CRAs raise the probability of default. Furthermore, rating stan- dards tend to be pro-cyclical, while biased CRA-incentives will ultimately be self-defeating.

Suggested Citation

  • Holden, Steinar & Natvig, Gisle James & Vigier, Adrien, 2012. "An Equilibrium Model of Credit Rating Agencies," Memorandum 01/2013, Oslo University, Department of Economics.
    • Handle: RePEc:hhs:osloec:2013_001
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    Cited by:

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    2. George-Marios Angeletos & Chen Lian, 2016. "Incomplete Information in Macroeconomics: Accommodating Frictions in Coordination," NBER Working Papers 22297, National Bureau of Economic Research, Inc.
    3. Gibert, Anna, 2022. "Signalling creditworthiness with fiscal austerity," European Economic Review, Elsevier, vol. 144(C).
    4. José Jorge, 2016. "Sovereign Ratings and Investor Behavior," CEF.UP Working Papers 1601, Universidade do Porto, Faculdade de Economia do Porto.

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    More about this item

    Keywords

    Credit rating agencies; global games; coordination failure;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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