Rating Change Probabilities An Empirical Analysis Of Sovereign Ratings

This study analyzes the determinants of rating changes and the variables' marginal effects on rating change probabilities. Based on the results, it presents transition matrices by computing transition probabilities. Furthermore, this study analyzes subsamples of the data set, conditional on the business cycle and the economic strength of a country, by using interaction effects. The Author of this study thereby verifies whether or how the transition matrices change by including interaction effects. He applies a latent variable approach, using an ordered probit model, to calculate the effects of different variables on the probabilities of rating changes.

We find that Credit Rating Agencies (CRA)'s opinions have an impact in the cost of funding of sovereign issuers and consequently ratings are a concern for financial stability. While ratings produced by the major CRAs perform reasonably well when it comes to rank ordering default risk among sovereigns, there is evidence of rating stability failure during the recent global financial crisis. These failures suggest that ratings should incorporate the obligor's resilience to stress scenarios. The empirical evidence also supports: (i) reform initiatives to reduce the impact of CRAs' certification services; (ii) more stringent validation requirements for ratings if they are to be used in capital regulations; and (iii) more transparency with regard to the quantitative parameters used in the rating process.

The financial difficulties experienced by Greece since 2009 serve as a reminder that countries (i.e., sovereigns) may default on their debt. Many observers considered the financial turmoil was behind us because major advanced countries had adopted stimulus packages to prevent banks from going bankrupt. However, there are rising doubts about the creditworthiness of several advanced countries that participated in the bailouts. In this uncertain context, it is particularly crucial to be knowledgeable about sovereign ratings. This book provides the necessary broad overview, which will be of interest to both economists and investors alike. Chapter 1 presents the main issues that are addressed in this book. Chapters 2, 3, and 4 provide the key notions to understand sovereign ratings. Chapter 2 presents an overview of sovereign rating activity since the first such ratings were assigned in 1918. Chapter 3 analyzes the meaning of sovereign ratings and the significance of rating scales; it also describes the refinement of credit rating policies and tools. Chapter 4 focuses on the sovereign rating process. Chapters 5 and 6 open the black box of sovereign ratings. Chapter 5 compares sovereign rating methodologies in the interwar years with those in the modern era. After examining how rating agencies have amended their methodologies since the 1990s, Chapter 6 scrutinizes rating disagreements between credit rating agencies (CRAs). Chapters 7 and 8 measure the performances of sovereign ratings by computing default rates and accuracy ratios: Chapter 7 looks at the interwar years and Chapter 8 at the modern era. The two chapters assess which CRA assigns the most accurate ratings during the respective periods. Chapters 9 and 10 compare the perception of sovereign risk by the CRAs and market participants. Chapter 9 focuses on the relation between JP Morgan Emerging Markets Bond Index Global spreads and emerging countries’ sovereign ratings for the period 1993–2007. Chapter 10 compares the eurozone members’ sovereign ratings with Credit Default Swap-Implied Ratings (CDS-IRs) during the Greek debt crisis of November 2009–May 2010.

This paper studies the sovereign ratings of 74 countries from 2003 to 2016, disentangling rating drivers into a 'fundamental' and 'judgement' component based on Moody's methodology. We show that the agency applies judgement inconsistently across regions, income, rating levels and factors, time and the direction of rating changes. While downgrades are significantly linked to contemporaneous negative fundamental developments, such as weakening public finances, for upgrades we find evidence of a lagged or 'catching-up' effect. Out of the 29 tested explanatory variables, judgement applied by the rating committee is best explained through government bond yields, real GDP growth, the debt trend and interest payments relative to revenues.

The question of whether ratings agencies convey new information to financial markets when they assign new ratings or change previous ratings has been debated for at least 40 years. In this study I first examine equity market, bond market and CDS market reactions to long and short term rating changes from S & P, Fitch and Moody's. I find that not all the credit rating changes affect the market but only those classified as unanticipated. Subsequently, I study whether the regulatory setting, in which the Credit Ratings Agencies work, can possibly affect the financial markets reactions. Lastly I show that the probability of a future rating change is severely affected by different factors proportional hazard rate models.

The business of credit ratings began in the United States in the early 1900s. Over time, credit ratings have gradually taken on an expanding role, both in the United States and abroad and in official financial market regulation as well as in private capital market decisions. However, in 1999 the Bank for International Settlements (through its Committee on Banking Supervision) proposed rule changes that would provide an explicit role for credit ratings in determining a bank's required regulatory risk capital. Once implemented, this BIS proposal (often referred to as Basel 2) would vastly elevate the importance of credit ratings by linking the required measure of bank capital to the credit rating of the bank's obligors. With these regulatory changes under active discussion, research into the role for ratings and rating agencies in the global financial system is particularly apropos. Ratings, Rating Agencies and the Global Financial System brings together the research of economists at New York University and the University of Maryland, along with those from the private sector, government bodies, and other universities. The first section of the volume focuses on the historical origins of the credit rating business and its present day industrial organization structure. The second section presents several empirical studies crafted largely around individual firm-level or bank-level data. These studies examine (a) the relationship between ratings and the default and recovery experience of corporate borrowers, (b) the comparability of credit ratings made by domestic and foreign rating agencies, and (c) the usefulness of financial market indicators for rating banks, among other topics. In the third section, the record of sovereign credit ratings in predicting financial crises and the reaction of financial markets to changes in credit ratings is examined. The final section of the volume emphasizes policy issues now facing regulators and credit rating agencies.

Sovereign risk and financial crises play a key role in current international economic developments, particularly in the case of economic downturns. As the Asian economic crisis in the late 1990s revealed once again, financial crises are the rule rather than the exception in capitalist economies. The event also revealed that international public debt agreements are contingent claims. In a world of increasing economic interdependencies, the issues of financial crises and country defaults are of critical importance. This volume goes to the heart of the academic discussion on sovereign risk and financial crises by centering on quantitative-empirical aspects, evaluating prominent approaches, and by proposing new methods. Part I of the volume identifies key factors and processes that are central in analyzing sovereign risk while Part II focuses on the determinants and effects of financial crises.

This paper analyzes if and what kind of sovereign rating bias exists. We analyze three possible biases. Firstly, rating agencies may have the incentive to rate countries where they earn more money better compared to countries where they earn less (profit maximizing bias). Secondly, different information asymmetry levels between the rated sovereigns and the rating agencies could lead to a bias (information asymmetry bias). A third bias could be due to the fact that a rating agency applies higher ratings to a country with which the country where the rating agency is located has stronger relations (home country bias). For the analysis of a potential home country preference we use a novel approach to the existing financial literature on rating bias: in particular, we use variables proxying the interconnection between the country in which the rating agency is headquartered and the rated country. This paper finds no empirical evidence of profit maximizing bias on the level of sovereign ratings but a significant bias in sovereign ratings caused by information asymmetry. The results of the analysis of home country bias are ambiguous. The interconnection of the US with the rated country proxied by the trade channel does not imply any home country bias; nevertheless, when a different proxy -- based on the interconnection between US-financial institutions and the respective countries -- is used, at first glance the results indicate a bias with respect to the ratings from Moody's only. However, this finding turns out not to be robust.

Offering a fresh look at the commonly accepted view of what constitutes good governance, Donald Nordberg explores the contexts of board decisions and draws upon his academic research and years of business and financial journalism in Europe, North America and Asia to provide a distinctive and pertinent contribution to the literature on corporate governance. The book: - Features 21 detailed case studies, drawn from international examples, to prompt discussion and analysis - Provides topical, up-to-date examples and evidence - Gives attention to the important question "What next for Corporate Governance?" Supporting features include: Case Study questions; "Agenda Point" boxes to provide further analysis and consideration on topical issues; Further readings; Companion Website, featuring online resources.