Do Multiple Credit Ratings Signal Complexity? Evidence from the European Triple-A Structured Finance Securities

18 Pages Posted: 24 May 2015

See all articles by Frank J. Fabozzi

Frank J. Fabozzi

EDHEC Business School

Mike Nawas

Nyenrode Business University

Dennis Vink

Nyenrode Business University

Date Written: March 15, 2014

Abstract

In much of the current research on market practices with respect to the use of credit ratings, the rating shopping hypothesis and the information production hypothesis feature prominently. Both of these hypotheses predict an inverse relationship between the number of ratings and a security’s funding cost; that is, more ratings will reduce funding costs and, conversely, fewer ratings will increase funding costs. Our study finds precisely the opposite to have been the case for the mainstay of the structured finance securities market in Europe prior to 2007, namely the triple-A tranches of European residential mortgage-backed securities. Our findings suggest that structured finance markets may behave differently than what would be predicted by two hypotheses traditionally used to explain the number of ratings and funding costs: the rating shopping and information production hypotheses. Obtaining multiple credit ratings may be a signal for complexity, for which investors demand a risk premium.

Keywords: Credit ratings, regulation, mortgage-backed securities

JEL Classification: G12, G24, L11

Suggested Citation

Fabozzi, Frank J. and Nawas, Mike and Vink, Dennis, Do Multiple Credit Ratings Signal Complexity? Evidence from the European Triple-A Structured Finance Securities (March 15, 2014). Available at SSRN: https://ssrn.com/abstract=2609522 or http://dx.doi.org/10.2139/ssrn.2609522

Frank J. Fabozzi

EDHEC Business School ( email )

France
215 598-8924 (Phone)

Mike Nawas

Nyenrode Business University ( email )

Straatweg 25
P.O. Box 130
Breukelen, 3620 AC
Netherlands

Dennis Vink (Contact Author)

Nyenrode Business University ( email )

Straatweg 25
P.O. Box 130
Breukelen, 3620 AC
Netherlands

HOME PAGE: http://www.dennisvink.nl

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