Abstract

Stability versus Topicality – When are Stable Agency Ratings to be Preferred to Market-Based Evaluations?

This article analyses in theoretical terms on the basis of strategic portfolio decisions the pros and cons of an information basis that is stable in the long term versus one that is topical, but more volatile. The effects of an evaluation method depend on the characteristics of the assets evaluated, notably their specificity and lifetime. Stable agency ratings mitigate the volatility of unspecific asset prices. On the other hand, the trade in short-term assets is more efficient when marked-based ratings are applied. For long-term assets, the degree of specificity, the upside/downside risk and the rating level are decisive. For specific assets, in particular, agency ratings are dominant where rating levels are sufficiently high and where transaction costs are low. Downgrading of ratings may result in trading inefficiencies increasing by leaps and bounds.