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
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: Suggested Citation
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