Credit Rating Dynamics and Competition
University of Aarhus
May 9, 2013
I analyze credit rating agencies and competition on a market with more than two agencies. Both investors and agencies react to each other’s behavior. My model predicts cyclic dynamics in the base case: not only does the presence of trusting investors facilitate ratings inflation. In turn, ratings inflation also induces investors to be less trusting. If trusting investors have a high impact on agencies’ reputation, the dynamics exhibits a saddle point rather than cycles. This is one case in which regulatory support for new, honest rating agencies is only needed for a limited time, but the effect is sustainable in the long run.
Number of Pages in PDF File: 39
Keywords: credit rating agencies, ratings inflation, evolutionary game theory
JEL Classification: D43, D82, G24, L15working papers series
Date posted: November 18, 2011 ; Last revised: May 21, 2013
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