TY - JOUR
T1 - Credit rating dynamics and competition
AU - Hirth, Stefan
N1 - Campus adgang til artiklen / Campus access to the article
PY - 2014/12
Y1 - 2014/12
N2 - I analyze the market for credit ratings with competition between more than two rating agencies. How can honest rating behavior be achieved, and under which conditions can a new honest rating agency successfully invade a market with inflating incumbents? My model predicts cyclic dynamics if sophisticated investors have a high impact on agencies’ reputation. In contrast, if trusting investors have the main impact, then the dynamics exhibits a saddle point rather than cycles. In this case, regulatory support for honest rating agencies is only needed for a limited time, but the effect is sustainable in the long run.
AB - I analyze the market for credit ratings with competition between more than two rating agencies. How can honest rating behavior be achieved, and under which conditions can a new honest rating agency successfully invade a market with inflating incumbents? My model predicts cyclic dynamics if sophisticated investors have a high impact on agencies’ reputation. In contrast, if trusting investors have the main impact, then the dynamics exhibits a saddle point rather than cycles. In this case, regulatory support for honest rating agencies is only needed for a limited time, but the effect is sustainable in the long run.
KW - Credit rating agencies
KW - Ratings inflation
KW - Evolutionary game theory
U2 - 10.1016/j.jbankfin.2014.08.011
DO - 10.1016/j.jbankfin.2014.08.011
M3 - Journal article
SN - 0378-4266
VL - 49
SP - 100
EP - 112
JO - Journal of Banking & Finance
JF - Journal of Banking & Finance
ER -