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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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Credit Ratings and Security Prices in the Subprime MBS Market

Article Citation

Ashcraft, Adam, Paul Goldsmith-Pinkham, Peter Hull, and James Vickery. 2011. "Credit Ratings and Security Prices in the Subprime MBS Market." American Economic Review, 101(3): 115-19.

DOI: 10.1257/aer.101.3.115

Abstract

We present and discuss preliminary evidence suggesting that credit ratings significantly influenced prices for subprime mortgage-backed securities issued in the period leading up to the recent financial crisis. Ratings are closely correlated with prices even controlling for a rich set of security- and loan-level controls. This incremental variation in ratings has much less predictive power for security defaults, however, based on findings to date from our ongoing research, suggesting prices were excessively sensitive to ratings relative to their informational content.

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Authors

Ashcraft, Adam (Federal Reserve Bank of New York)
Goldsmith-Pinkham, Paul (Harvard U)
Hull, Peter (Federal Reserve Bank of New York)
Vickery, James (Federal Reserve Bank of New York)

JEL Classifications

D83: Search; Learning; Information and Knowledge; Communication; Belief
G21: Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
G24: Investment Banking; Venture Capital; Brokerage; Ratings and Ratings Agencies