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Rating Inflation versus Deflation: On Procyclical Credit Ratings

Author

Listed:
  • Chen, Yongmin
  • Gu, Dingwei
  • Yao, Zhiyong

Abstract

Credit rating agencies play a crucial role in financial markets. There are two competing views regarding their behavior: some argue that they engage in rating inflation, while others suggest that they deflate ratings. This article offers a rationale that reconciles the two opposite arguments. We find that both rating inflation and rating deflation can occur in equilibrium. Furthermore, we show that credit rating is procyclical: rating inflation is more likely to happen in a boom while rating deflation is more likely to happen in a recession.

Suggested Citation

  • Chen, Yongmin & Gu, Dingwei & Yao, Zhiyong, 2013. "Rating Inflation versus Deflation: On Procyclical Credit Ratings," MPRA Paper 51159, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:51159
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    References listed on IDEAS

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    Cited by:

    1. Patrycja Chodnicka-Jaworska, 2016. "Credit Ratings Inflation Phenomenon – Are There Any Diffrences in the Credit Ratings Determinants? (Zjawisko inflacji credit ratingow – czy wystepuja roznice w determinantach credit ratingow?)," Research Reports, University of Warsaw, Faculty of Management, vol. 2(22), pages 48-59.

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    More about this item

    Keywords

    rating inflation; rating deflation; procyclical rating;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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