Does the Market Understand Rating Shopping? Predicting MBS Losses with Initial Yields

Jie He; Jun Qian; Philip E. Strahan

doi:10.1093/rfs/hhv067

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Does the Market Understand Rating Shopping? Predicting MBS Losses with Initial Yields

Jie He¹; Jun Qian²; Philip E. Strahan³

¹ University of Georgia · ² Shanghai Jiao Tong University · ³ Boston College

Review of Financial Studies 2016

We study rating shopping on the MBS market. Outside of AAA, losses are higher on single-rated 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. Received January 22, 2014; accepted October 21, 2015 by Editor Andrew Karolyi.

DOI: 10.1093/rfs/hhv067
Volume: 29 (2)
Pages: 457-485
Language: en
Export: BibTeX
Sources: openalex crossref