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Credit Rating Dynamics: Evidence from a Natural Experiment

Author

Listed:
  • Abidi, Nordine
  • Falagiarda, Matteo
  • Miquel-Flores, Ixart

Abstract

The paper investigates the behaviour of credit rating agencies (CRAs) using a natural experiment in monetary policy. Specifically, it exploits the corporate QE of the Eurosystem and its rating-based specific design which generates exogenous variation in the probability for a bond of becoming eligible for outright purchases. The authors show that after the launch of the policy, rating upgrades were mostly noticeable for bonds initially located below, but close to, the eligibility frontier. In line with the theory, rating activity is concentrated precisely on the territory where the incentives of market participants are expected to be more sensitive to the policy design. Complementing the evidence on the activeness of non-standard measures, the findings contribute to better assessing the consequences of the explicit (but not exclusive) reliance on CRAs ratings by central banks when designing monetary policy.

Suggested Citation

  • Abidi, Nordine & Falagiarda, Matteo & Miquel-Flores, Ixart, 2019. "Credit Rating Dynamics: Evidence from a Natural Experiment," ECMI Papers 498, Centre for European Policy Studies.
  • Handle: RePEc:eps:ecmiwp:498
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    Cited by:

    1. Taneli Mäkinen & Fan Li & Andrea Mercatanti & Andrea Silvestrini, 2020. "Effects of eligibility for central bank purchases on corporate bond spreads," Temi di discussione (Economic working papers) 1300, Bank of Italy, Economic Research and International Relations Area.
    2. Berg, Tobias & Haselmann, Rainer & Kick, Thomas & Schreiber, Sebastian, 2022. "Unintended side effects of unconventional monetary policy," LawFin Working Paper Series 27, Goethe University, Center for Advanced Studies on the Foundations of Law and Finance (LawFin).
    3. Zaghini, Andrea, 2021. "The Covid pandemic in the market: infected, immune and cured bonds," Working Paper Series 2563, European Central Bank.
    4. Martijn Boermans & Bram van der Kroft, 2020. "Capital regulation induced reaching for systematic yield: Financial instability through fire sales," Working Papers 673, DNB.

    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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