131 T4 .h3e dpeaspcer ri bperso coeuerdds aatsa sf oeltl oawn ds . Sv ea cr it ai obnl e4 c. 2o nr es vt ri euwc tsi ot nh earnedl aSt ee dc t li iot ne r a4 t. 4u rsee. tSse cf ot irot nh our empirical strategy. Section 4.5 contains our analysis and the main empirical results. Section 4.6 summarizes our findings. 4.2 Literature Review To fh emGoFr tCg at hg ae ts sttoa rwt eeda ki n bt ohrer soewc eornsd (hs ao l-fc oa lf l e2d0 0s7u bwparsi mc aeu ms eodr bt gyaagne so)vwe rheixcthe nws ei orne packaged and sold to investors. It is alleged in numerous lawsuits by investors that tranches of subprime RMBS had inflated credit ratings, resulting in olovwereprrcirceindgitorfistkh.ese securities since investors were led to believe that they had 38 What followed was a market meltdown when mortgage rates ii nn ctrheea cs ea ds e, wo fhsi cuhb pr er si mu let emd oi nr t hg iagghe sd)e wf a hu ol t hr aa dt e as dajmu sot na gb lhe o- rma teeo mw on retrgsa(gpeasr itni c 2u 0l a0r7l y- 22 00 00 89 ) a. nI nd tfuarcne,dt hae “vma ol uret goafg he opma ye ms deenct l isnheodc, kl ”e a(ds ei neg et. og . ,a Rf ui crht ha redr sionnc raena ds e Wi nhti ht ee, default rate due to what is best described as “strategic defaults”.39 It is alleged that this chain of events led to the subprime mortgage crisis and the subsequent Ga srseiagtn eRde cbeys sCi Ro nA soaf n2d0t0h8e swe ai ns f lpartiemd acrri el yd iat trt ar it bi nugt sa bwl ee rteo diunef l at ot ecdo mc rpeedtiitt i roant ianngds the business model in the industry (He et al., 2015). The substantial losses in the Ri nMv eBsSt omr adrekme tahnadv ed rc oa pu ps ee dd ms i ag jnoirf i rceapnut ltya, t ai onnda lr edgauml aatgoerss f iomr ps el ecmu rei nt i tzeedd mp roordeuac nt sd; stricter rules and regulations after the GFC. 38 The increased complexity of securities made it rather difficult for investors to assess the underlying credit risks oo fr Rt rMu Bs tSe. eCso. nFsoerqeuxeanmt l yp, l et h, eDye ka pu peeta rael .d ( t2o0 r1e9l )y smhoorwe ht he aa tv itl hy eo nr erpi us kt aat isos ne s os mf ternutsst ebeys e(xttheor snea lnpoamr ti ineast es ud c tho aps rCo Rt eAcst imnvoerestcoorm’s pinletxe.rest) was considered more important by investors during the GFC, when risk assessments became 39 A strategic default occurs when a homeowner finds that the market value of the property is less than the remaining mortgage balance. Chapter 4 - Intensified Competition and the Impact on Credit Ratings
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