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American Economic Review: Vol. 101 No. 3 (May 2011)

AER Volume. 101, Issue 3 | Previous ArticleNext Article

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Did Credit Rating Agencies Make Unbiased Assumptions on CDOs?

Article Citation

Griffin, John M., and Dragon Yongjun Tang. 2011. "Did Credit Rating Agencies Make Unbiased Assumptions on CDOs?." American Economic Review, 101(3): 125-30.

DOI: 10.1257/aer.101.3.125

Abstract

We compare key CDO assumptions from two departments within the same rating agency but with different financial incentives. Assumptions made by the ratings division are more favorable than those by the surveillance department. The differences are not explained by collateral switching during the ramp-up period, a long time gap between reports, nor the collapse of the CDO market in 2007 Additionally, CDOs rated with more favorable assumptions by the ratings group were more likely to be subsequently downgraded. As the useful signals from the surveillance group were seemingly ignored, these findings suggest rating agencies bias towards high ratings.

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Authors

Griffin, John M. (U TX)
Tang, Dragon Yongjun (U Hong Kong)

JEL Classifications

G21: Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
G24: Investment Banking; Venture Capital; Brokerage; Ratings and Ratings Agencies