Rating Inflation versus Deflation: On Procyclical Credit Ratings

22 Pages Posted: 3 Nov 2013

See all articles by Yongmin Chen

Yongmin Chen

University of Colorado at Boulder - Department of Economics

Dingwei Gu

Fudan University - School of Management

Zhiyong Yao

Fudan University - School of Management

Date Written: November 2, 2013

Abstract

Credit rating agencies play a crucial role in financial markets. There are two competing views regarding their behavior: some argue that they engage in rating inflation, while others suggest that they deflate ratings. This article offers a rationale that reconciles the two opposite arguments. We find that both rating inflation and rating deflation can occur in equilibrium. Furthermore, we show that credit rating is procyclical: rating inflation is more likely to happen in a boom while rating deflation is more likely to happen in a recession.

Keywords: rating inflation, rating deflation, procyclical rating

JEL Classification: D82, G10, G24

Suggested Citation

Chen, Yongmin and Gu, Dingwei and Yao, Zhiyong, Rating Inflation versus Deflation: On Procyclical Credit Ratings (November 2, 2013). Available at SSRN: https://ssrn.com/abstract=2349003 or http://dx.doi.org/10.2139/ssrn.2349003

Yongmin Chen

University of Colorado at Boulder - Department of Economics ( email )

Campus Box 256
Boulder, CO 80309-0256
United States
303-492-8736 (Phone)
303-492-8960 (Fax)

Dingwei Gu

Fudan University - School of Management ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433
China

Zhiyong Yao (Contact Author)

Fudan University - School of Management ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433
China

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