Does the Market Understand Rating Shopping? Predicting MBS Losses with Initial Yields

Review of Financial Studies, Volume 29, Issue 2, pp. 457-485

44 Pages Posted: 21 Aug 2013 Last revised: 22 Jan 2016

See all articles by Jie He

Jie He

University of Georgia - Department of Finance

Jun "QJ" Qian

Fanhai International School of Finance, Fudan University

Philip E. Strahan

Boston College - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: October 27, 2015

Abstract

We study rating shopping on the MBS market. Outside of AAA, losses were higher on single-rated tranches than multi-rated ones, and yields predict future losses for single-rated tranches but not for multi-rated ones. Conversely, ratings have less explanatory power for single-rated tranches. These results suggest that single-rated tranches have been ‘shopped,’ whereby pessimistic ratings never reach the market. For AAA-rated MBS, by contrast, 93% receive two or three such ratings, and those ratings agree 97% of the time. This ratings convergence suggests that agencies ‘catered’ to investors, who could not purchase a tranche unless it has multiple AAA ratings.

Keywords: credit ratings, mortgage-backed securities, shopping, loss, yield

JEL Classification: G21, G24, G28, G1, L1

Suggested Citation

He, Jie and Qian, Jun and Strahan, Philip E., Does the Market Understand Rating Shopping? Predicting MBS Losses with Initial Yields (October 27, 2015). Review of Financial Studies, Volume 29, Issue 2, pp. 457-485, Available at SSRN: https://ssrn.com/abstract=2313220 or http://dx.doi.org/10.2139/ssrn.2313220

Jie He (Contact Author)

University of Georgia - Department of Finance ( email )

B318 Amos Hall
Terry College of Business, University of Georgia
Athens, GA 30602-6253
United States

Jun Qian

Fanhai International School of Finance, Fudan University ( email )

Shanghai
China
86-21-63895501 (Phone)
86-21-62934572 (Fax)

HOME PAGE: http://www.fisf.fudan.edu.cn/show-65-69.html

Philip E. Strahan

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States
617-552-6430 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://www2.bc.edu/~strahan

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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