1. Does the Market Understand Rating Shopping? Predicting MBS Losses with Initial Yields.
- Author
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He, Jie (Jack), Qian, Jun (Q. J.), and Strahan, Philip E.
- Subjects
MORTGAGE-backed securities ,STOCK ratings ,SECURITIES ,SHOPPING ,FINANCIAL markets ,SECURITIES industry ,INVESTORS ,ECONOMICS ,MANAGEMENT ,FINANCE ,FORECASTING ,RATE of return - Abstract
We study rating shopping on the MBS market. Outside ofAAA, losses are higher on singlerated tranches than on multi-rated ones, and yields predict future losses for single-rated tranches, but not for multi-rated ones. Conversely, ratings have less explanatory power for single-rated tranches. These results suggest that single-rated tranches have been "shopped," whereby pessimistic ratings never reach the market. For AAA-rated MBS, by contrast, 93% receive two or three such ratings, and those ratings agree 97% of the time. This ratings convergence suggests that agencies "cater" to investors, who cannot purchase a tranche unless it has multiple AAA ratings. [ABSTRACT FROM AUTHOR]
- Published
- 2016
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