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Journal of Economic Interaction and Coordination

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01.04.2014 | Regular Article

The effect of rating agencies on herd behaviour

verfasst von: Giovanni Ferri, Andrea Morone

Erschienen in: Journal of Economic Interaction and Coordination | Ausgabe 1/2014

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Abstract

This paper purports to provide some evidence on the effect of rating agencies in financial markets. By means of a laboratory experiment, we investigate the effect and interaction between private and public information. We reached two conclusions: (1) indeed, the rating agency can speed up price convergence, (2) but not always to the fundamental price.

Vorheriger Artikel Cognitive capacity and cognitive hierarchy: a study based on beauty contest experiments

Nächster Artikel Common-value auction versus posted-price selling: an agent-based model approach

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For some experimental evidence and theoretical developments see Banerjee (1992), Anderson and Holt (1997), Allsopp and Hey (2000), Fiore and Morone (2008), Morone and Samanidou (2008) and Morone (2012).

A summary of the progress made by this strand of literature can be found in Plott (2002).

For instance, Kuhner (1999) argues that, in a systemic crisis, their payoffs may lead rating agencies to an equilibrium in which they pool “good” borrowers together with “bad” borrowers.

Contrary to most authors, a limited number of papers find evidence of negative abnormal returns following rating downgrades (Glascock et al. 1987; Hsueh and Liu 1992).

It is possible to extend this result to the case of subjects with different risk attitude, see the “Appendix”.

In treatment 2 \(n= 14\).

The pay off that subjects received is given by the money they have at the end of the period, plus the value of the assets they posses at the end of the period, minus 1,000 ECU (the initial endowment of money).

The quality of information may vary across rating agencies because of different reasons. For instance, Norden and Weber (2004) show that reviews for downgrade by S&P and Moody’s have the largest impact on credit default swaps and shares, while Ferri (2004) finds that the quality of information implicit in the ratings depends on the effort exerted by the rating agency.

We do not show the results for the four practice periods.

We evaluated \(\alpha \) using the last 20 transaction prices in each period; \(\sigma \) is the standard deviation of the transaction price p from the target (i.e. the correct dividend, the uninformed price, or the public information price), and \(\Delta \) is the extent of the price range.

These results are confirmed by a Mann-Whitney test at a 1 % significance level.

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Titel: The effect of rating agencies on herd behaviour
verfasst von: Giovanni Ferri
Andrea Morone
Publikationsdatum: 01.04.2014
Verlag: Springer Berlin Heidelberg
Erschienen in: Journal of Economic Interaction and Coordination / Ausgabe 1/2014
Print ISSN: 1860-711X
Elektronische ISSN: 1860-7128
DOI: https://doi.org/10.1007/s11403-013-0114-0

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