Competition Among the Big Three: How Multiple Credit Ratings Pay Off for Investors

Asymmetric information is an important characteristic of the securitization market, where products exhibit complex architecture and information about the underlying credit portfolio is highly opaque. In order to overcome these information asymmetries, issuers use rating agencies who act as agents and provide a credit rating at tranche-level for each issued security. In fact, based on our data, most of these tranches were rated by more than one rating agency and few of the tranches had been downgraded by the beginning of 2008. Ultimately, investors have to bear the costs of multiple ratings in the form of lower interest rates on … Read more