Abstract: The recent financial crisis has brought renewed attention to the failure of the credit rating mechanism and the strategic nature of credit ratings. In this paper, we conduct a structural analysis of strategic credit rating behavior in the Commercial Mortgage-Backed Security (CMBS) market, using a model of CMBS credit ratings where every rating agency's ratings reflect peer effects from other rating agencies. We establish semiparametric identification of the model by exploiting an exogenous equilibrium shift due to the financial crisis and incorporate the peer effects through the estimation of market "beliefs" on the ratings. Our estimation of the model using Bloomberg data on CMBS deals suggests that there is strong evidence of positive peer effects in ratings. We also find that including peer effects improves the fitness of our model of credit ratings.
Keywords: Credit rating agencies, Commercial Mortgage-Backed Security (CMBS), Peer effects, Reflection problem, Multiple equilibria
JEL Classification: G