The Use of Credit Ratings in Financial Markets

72 Pages Posted: 16 Jul 2018 Last revised: 6 Dec 2021

See all articles by Ramin Baghai

Ramin Baghai

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swedish House of Finance

Bo Becker

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); ECGI

Stefan Pitschner

Uppsala University

Multiple version iconThere are 2 versions of this paper

Date Written: December 3, 2021

Abstract

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

Baghai, Ramin and Becker, Bo and Pitschner, Stefan, The Use of Credit Ratings in Financial Markets (December 3, 2021). Swedish House of Finance Research Paper No. 18-13, European Corporate Governance Institute - Finance Working Paper No. 612/2019, Available at SSRN: https://ssrn.com/abstract=3201006 or http://dx.doi.org/10.2139/ssrn.3201006

Ramin Baghai

Stockholm School of Economics ( email )

PO Box 6501
Stockholm, 11383
Sweden

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Bo Becker (Contact Author)

Stockholm School of Economics ( email )

Drottninggatan 98
Dept. of Finance
111 60 Stockholm, 11160
Sweden

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

ECGI ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Stefan Pitschner

Uppsala University ( email )

Box 513
Uppsala, 751 20
Sweden

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