Building on the idea that precision of credit ratings matters for the efficiency of investors' portfolio decisions, the paper analyzes the equilibrium precision of ratings. Our analysis explains why ratings are noisy, exhibit rating inflation and vary across asset classes and over the economic...

In this paper, we consider a new corporate bond-pricing model with credit-rating migration risks and a stochastic interest rate. In the new model, the criterion for rating change is based on a predetermined ratio of the corporation’s total asset and debt. Moreover, the rating changes are...

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...