Working Paper

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

Abstract: 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.

Keywords: Financial institutions; Uncertainty;

https://doi.org/10.26509/frbc-wp-201222

Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers (Old Series)

Publication Date: 2012

Number: 1222