Are All Ratings Created Equal? The Impact of Issuer Size on the Pricing of Mortgage-Backed Securities
53 Pages Posted: 25 Nov 2009 Last revised: 27 Nov 2012
Date Written: January 20, 2012
Initial yields on both AAA-rated and non-AAA rated mortgage-backed security (MBS) tranches sold by large issuers are higher than yields on similar tranches sold by small issuers during the market boom years of 2004-2006. Moreover, the prices of MBS sold by large issuers drop more than those sold by small issuers, and the differences are concentrated among tranches issued during 2004-2006. These patterns suggest that investors priced the risk that large issuers received more inflated ratings than small issuers, especially during booming periods.
Keywords: Credit ratings, mortgage-backed securities, tranche, conflict of interest, yield
JEL Classification: G2, G1, L1
Suggested Citation: Suggested Citation