Are All Ratings Created Equal? The Impact of Issuer Size on the Pricing of Mortgage-Backed Securities
University of Georgia - Department of Finance
Shanghai Advanced Institute of Finance(SAIF), Shanghai Jiao Tong University; University of Pennsylvania - Wharton Financial Institutions Center; China Academy of Financial Research (CAFR)
Philip E. Strahan
Boston College - Department of Finance; National Bureau of Economic Research (NBER)
January 20, 2012
Journal of Finance, Vol. 67, No. 6, pp. 2097-2137, December 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.
Number of Pages in PDF File: 53
Keywords: Credit ratings, mortgage-backed securities, tranche, conflict of interest, yield
JEL Classification: G2, G1, L1
Date posted: November 25, 2009 ; Last revised: November 27, 2012