Do Multiple Credit Ratings Signal Complexity ? Evidence from the European Triple-A Structured Finance Securities

Frank J. Fabozzi, Mike E. Nawas, Dennis Vink: In much of the current research on market practices with respect to the use of credit ratings, the rating shopping hypothesis and the information production hypothesis feature prominently.

Author(s):

Frank J. Fabozzi

EDHEC-Risk Institute

Mike E. Nawas

Bishopsfield Capital Partners

Dennis Vink

Nyenrode Business Universiteit

Both of these hypotheses predict an inverse relationship between the number of ratings and a security’s funding cost; that is, more ratings will reduce funding costs and, conversely, fewer ratings will increase funding costs. Our study finds precisely the opposite to have been the case for the mainstay of the structured finance securities market in Europe prior to 2007, namely the triple-A tranches of European residential mortgage-backed securities. Our findings suggest that structured finance markets may behave differently than what would be predicted by two hypotheses traditionally used to explain the number of ratings and funding costs: the rating shopping and information production hypotheses. Obtaining multiple credit ratings may be a signal for complexity, for which investors demand a risk premium.
Pdf
Do Multiple Credit Ratings Signal Complexity ? Evidence from the European Triple...
(-1.00 B)
Type: Working paper
Date: le 03/03/2014
Extra information : For more information, please contact EDHEC Research and Development Department [ research@drd.edhec.edu ]
Research Cluster : Finance

See Also

How To: 8 tips for choosing your MBA
News
- 08-03-2019
Embarking on an MBA can be life-changing. It’s also an investment on many levels; you’...
European Excellence and Make an Impact Scholarships available for September 2019 Intake
News
- 07-03-2019
Two New Scholarship Programmes for 2019 EDHEC Business School has added two new Global...
Paper co-authored by Lionel Martellini and Vincent Milhau wins the 20th Annual Bernstein Fabozzi/Jacobs Levy Award for Outstanding Article from the Journal of Portfolio Management
News
- 04-03-2019
The paper, entitled "Proverbial Baskets Are Uncorrelated Risk Factors! A Factor-Based...
One life, one journey - Hard work and dedication pay off
News
- 04-03-2019
Temitope Ayorinde, a 2018 Master in Management, Business Management graduate, left his...