An Equilibrium Model of Credit Rating Agencies

34 Pages Posted: 20 Mar 2013

See all articles by Steinar Holden

Steinar Holden

University of Oslo - Department of Economics; Norges Bank; CESifo (Center for Economic Studies and Ifo Institute)

Gisle James James Natvik

BI Norwegian Business School - Department of Economics

Adrien Vigier

University of Oxford - Department of Economics

Date Written: December 18, 2012

Abstract

We develop a model of credit rating agencies (CRAs) based on reputation concerns. Ratings affect investors' choice and, thereby, also issuers' access to funding and default risk. We show that - in equilibrium - the informational content of credit ratings is inferior to that of CRAs' private information. We find that CRAs have a pro-cyclical impact on default risk: in a liquidity boom CRAs help resolve investors' coordination problem, and lower the probability of default; in a liquidity crunch CRAs raise the probability of default. Furthermore, rating standards tend to be pro-cyclical, while biased CRA-incentives will ultimately be selfdefeating.

Keywords: Credit rating agencies, global games, coordination failure

JEL Classification: G24, G33, D82, C72

Suggested Citation

Holden, Steinar and Natvik, Gisle James James and Vigier, Adrien, An Equilibrium Model of Credit Rating Agencies (December 18, 2012). Norges Bank Working Paper 23, Available at SSRN: https://ssrn.com/abstract=2233578 or http://dx.doi.org/10.2139/ssrn.2233578

Steinar Holden (Contact Author)

University of Oslo - Department of Economics ( email )

P.O. Box 1095 Blindern
N-0317 Oslo
Norway
+47 22 85 51 56 (Phone)
+47 22 85 50 35 (Fax)

HOME PAGE: http://folk.uio.no/~sholden/

Norges Bank ( email )

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CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Gisle James James Natvik

BI Norwegian Business School - Department of Economics ( email )

Nydalsveien 37
Oslo, 0484
Norway

Adrien Vigier

University of Oxford - Department of Economics ( email )

Manor Road Building
Manor Road
Oxford, OX1 3BJ
United Kingdom

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