The Use of Credit Ratings in Financial Markets
72 Pages Posted: 16 Jul 2018 Last revised: 6 Dec 2021
Date Written: December 3, 2021
Fixed income fund investment mandates constrain managers’ portfolio decisions, often employing credit ratings to categorize asset risk. We use textual analysis to categorize U.S. and European fixed income funds’ mandates and to measure the use of ratings in mandates. Over the past two decades, despite the weaknesses revealed in the global financial crisis, ratings use increased significantly. Since 2010, the fraction of funds not using ratings in any way has fallen by almost half in both the U.S. and Europe. By 2020, 94% of U.S. funds and 68% of European funds use ratings. These patterns fit agency-based models of investment mandates and point to a lack of practically useful alternatives.
Keywords: Credit ratings, investment mandates, delegated asset management, financial crisis
JEL Classification: G24, G23, G01
Suggested Citation: Suggested Citation