Credit Ratings across Asset Classes: A Long-Term Perspective
Kimberly Rodgers Cornaggia
American University - Kogod School of Business
Rice University - Jesse H. Jones School of Management
May 28, 2015
Regulators have historically relied on credit ratings to establish capital requirements, assuming that credit ratings mean the same thing for different asset classes. Defaults among Aaa-rated structured finance products during the recent financial crisis challenged this assumption. In response, the Dodd-Frank Act mandates standardization of ratings across security types. Our contribution to the literature is a comprehensive examination of the behavior of ratings across all major asset classes over the past 30 years. The divergent behavior of ratings across asset classes during the crisis was an extreme case, but not an isolated incident. We show that ratings exhibit persistent differences across asset classes, consistent with the fact that different asset types have fundamentally different risk profiles. We conclude that the Dodd-Frank mandate will prove difficult to enforce and instead advocate a regulatory framework that distinguishes risk across asset classes.
Number of Pages in PDF File: 52
Keywords: Credit Ratings, Municipal Bonds, Sovereign Credit Risk, Public Finance, Structured Finance, Regulatory Capital
JEL Classification: G14, G24, G28, G32
Date posted: August 15, 2011 ; Last revised: June 1, 2015
© 2015 Social Science Electronic Publishing, Inc. All Rights Reserved.
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