Precision of Ratings

67 Pages Posted: 13 Mar 2013 Last revised: 11 Aug 2020

See all articles by Anastasia V. Kartasheva

Anastasia V. Kartasheva

University of St. Gallen - I.VW-HSG; Joshua J. Harris Alternative Investment Program

Bilge Yilmaz

University of Pennsylvania - Finance Department

Date Written: February 10, 2020

Abstract

Building on the idea that precision of credit ratings matters for the efficiency of investors' portfolio decisions, the paper analyzes the equilibrium precision of ratings. Our analysis explains why ratings are noisy, exhibit rating inflation and vary across asset classes and over the economic cycle. It also reveals that a laissez-faire CRA provides socially inefficient rating precision and that precision of ratings is further reduced by costly information acquisition. The model is applied to evaluate the post-crisis policy proposals of regulation of CRAs. It explains how CRA response to some but not all regulations can further reduce market efficiency.

Keywords: credit rating agencies, rating precision, information intermediation

JEL Classification: D82, D83, G01, G18, G24, G28, L15

Suggested Citation

Kartasheva, Anastasia V. and Yilmaz, Bilge, Precision of Ratings (February 10, 2020). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, Available at SSRN: https://ssrn.com/abstract=2232998 or http://dx.doi.org/10.2139/ssrn.2232998

Anastasia V. Kartasheva (Contact Author)

University of St. Gallen - I.VW-HSG ( email )

Kirchlistrasse 2
St. Gallen, 9010
Switzerland

Joshua J. Harris Alternative Investment Program ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

Bilge Yilmaz

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-1163 (Phone)
215-898-6200 (Fax)

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