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Credit ratings and structured finance

Abstract:
The poor performance of credit ratings of structured finance products in the financial crisis has prompted investigation into the role of credit rating agencies (CRAs) in designing and marketing these products. We analyze a two-period reputation model in which a CRA both designs and rates securities that are sold both to investors who are constrained to purchase highly rated securities and investors who are unconstrained. Assets are pooled and senior and junior tranches are issued with a waterfall structure. When the rating constraint is lax, the CRA will include only risky assets in the securitization pool, serving both types of investors without any rating inflation. Rating inflation is decreasing in the tightness of the rating constraint locally. But rating inflation may be non-monotonic in the rating constraint globally, with no rating inflation when the constraint is lax or tight.
Publication status:
Published
Peer review status:
Peer reviewed

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Publisher copy:
10.1016/j.jfi.2019.03.003

Authors


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Institution:
University of Oxford
Division:
SSD
Oxford college:
St Cross College
Role:
Author


Publisher:
Elsevier
Journal:
Journal of Financial Intermediation More from this journal
Volume:
41
Article number:
100816
Publication date:
2019-04-17
Acceptance date:
2019-03-23
DOI:
ISSN:
1042-9573


Language:
English
Keywords:
Pubs id:
pubs:984215
UUID:
uuid:62646ff3-a237-42c4-a53e-19990fa00bf0
Local pid:
pubs:984215
Source identifiers:
984215
Deposit date:
2019-03-25

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