Working paper/research report

Authors list: Bannier, Christina E.; Tyrell, Marcel

Publication year: 2011

DOI Link: https://doi.org/10.2139/ssrn.1564029

Abstract: 

Do rating agencies increase or decrease financial market stability? This paper analyzes whether credit rating agencies may help to avoid inefficient self-fulfilling credit defaults. If investors follow risk-dominant strategies, we show that rating announcements and investors' private information are complements as far as highly-rated entities are concerned. This helps to stabilize investment behavior and increase efficiency. Rating agencies may even spark off a virtuous circle that increases aggregate information precision. Lack of private information, however, endangers market stability and may trigger credit crises. For lowly-rated entities the opposite holds as private information turns into a substitute for the agencies' services.

Harvard Citation style: Bannier, C. and Tyrell, M. (2011) Credit rating agencies, financial market stability, and efficiency. SSRN. https://doi.org/10.2139/ssrn.1564029

APA Citation style: Bannier, C., & Tyrell, M. (2011). Credit rating agencies, financial market stability, and efficiency. SSRN. https://doi.org/10.2139/ssrn.1564029