Incentive and constraint regulations of rating inflation in collusion over the separation of economic cycles - Markov rating shopping dual reputation model.

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ID: 40907
2018
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Abstract
Economic cycles may lead to changes in corporate bond credit ratings. This paper utilizes the Markov model to describe transition probability matrixes of economic states for the separation of economic cycles. We develop a new model, which we term the Markov rating shopping dual reputation model, incorporating two reputation effects. This model is well suited to analyze the conditions of the dual rating incentive regulation and the constraint regulation for preventing rating inflation in collusion among credit rating agencies. Then, we apply the Markov regime switching-vector auto-regression (MS-VAR) to estimate the transition probability matrixes of America, England, Japan and China. Based on the numerical analysis and the simulations, the results show that a dual rating regulation can prevent the collusion of inflated ratings, as well as increased rating fees with the separation of economic cycles; additionally, when separating the economic cycles, a constraint regulation is more effective at reducing the risk of rating inflation in collusion and regulatory cost.
Reference Key
zhou2018incentiveplos Use this key to autocite in the manuscript while using SciMatic Manuscript Manager or Thesis Manager
Authors Zhou, Xiangyun;Tian, Yixiang;Zhang, Ping;Chen, Xiurong;
Journal PloS one
Year 2018
DOI
10.1371/journal.pone.0205415
URL
Keywords Keywords not found

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