Is There A Bias In Sovereign Ratings Due To Financial Reasons
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Author | : Hasan Doluca |
Publisher | : |
Total Pages | : 11 |
Release | : 2014 |
Genre | : |
ISBN | : |
There exist different kinds of biases in sovereign ratings. In this paper we analyze one of the possible rating biases, i.e. we examine if 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). This paper finds no empirical evidence of profit maximizing bias on the level of sovereign ratings: In the rating process for countries the reputational concerns seem to dominate over financial interests. To our knowledge, this paper is the first analysis examining the issue of profit maximizing bias on the sovereign level.
Author | : Hasan Doluca |
Publisher | : |
Total Pages | : 59 |
Release | : 2014 |
Genre | : |
ISBN | : |
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.
Author | : Bertrand Candelon |
Publisher | : International Monetary Fund |
Total Pages | : 30 |
Release | : 2011-03-01 |
Genre | : Business & Economics |
ISBN | : 1455225061 |
This paper examines the spillover effects of sovereign rating news on European financial markets during the period 2007-2010. Our main finding is that sovereign rating downgrades have statistically and economically significant spillover effects both across countries and financial markets. The sign and magnitude of the spillover effects depend both on the type of announcements, the source country experiencing the downgrade and the rating agency from which the announcements originates. However, we also find evidence that downgrades to near speculative grade ratings for relatively large economies such as Greece have a systematic spillover effects across Euro zone countries. Rating-based triggers used in banking regulation, CDS contracts, and investment mandates may help explain these results.
Author | : Andreas Fuchs |
Publisher | : |
Total Pages | : |
Release | : 2013 |
Genre | : |
ISBN | : |
Author | : D. Tennant |
Publisher | : Springer |
Total Pages | : 136 |
Release | : 2017-08-15 |
Genre | : Business & Economics |
ISBN | : 1137391502 |
Sovereign Debt and Credit Rating Bias rejects the notion that credit rating agencies' rigorous and transparent determination of ratings leaves no room for bias, and debunks the myth that the value CRAs place on their reputational capital precludes prolonged biases. To determine the extent of CRAs' biased actions, Tennant and Tracey apply a rigorous methodology to a well-established economic model of the determinants of sovereign debt quality. They present strong evidence of bias against poor countries and demonstrate how biased rating changes could disadvantage such countries and the companies operating therein as they seek access to international capital markets. They discuss plausible explanations for the bias and suggest remedial measures that would help ensure balance in credit rating changes. This book fills an important gap by rigorously examining a long-standing but often ignored concern about the rating practices of credit rating agencies.
Author | : Mr.John Kiff |
Publisher | : International Monetary Fund |
Total Pages | : 35 |
Release | : 2012-01-01 |
Genre | : Business & Economics |
ISBN | : 1463998724 |
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.
Author | : Mr.Giovanni Dell'Ariccia |
Publisher | : International Monetary Fund |
Total Pages | : 54 |
Release | : 2018-09-07 |
Genre | : Business & Economics |
ISBN | : 1484359623 |
This paper reviews empirical and theoretical work on the links between banks and their governments (the bank-sovereign nexus). How significant is this nexus? What do we know about it? To what extent is it a source of concern? What is the role of policy intervention? The paper concludes with a review of recent policy proposals.
Author | : Hasan Doluca |
Publisher | : |
Total Pages | : 23 |
Release | : 2014 |
Genre | : |
ISBN | : |
This paper analyzes if the so called home country bias exists in sovereign ratings: Home country 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. 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. 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 could not be verified by the robustness check. Thus, the ambiguous results show the need for further research on this issue.
Author | : Ashok Vir Bhatia |
Publisher | : International Monetary Fund |
Total Pages | : 68 |
Release | : 2002-10 |
Genre | : Business & Economics |
ISBN | : |
This paper describes and evaluates the sovereign credit ratings methodologies of Standard & Poor's, Moody's Investors Service, and Fitch Ratings. A simple definition of ratings failure-based on ratings stability-is proposed and tested, pointing to falling failure rates, consistent upside bias, and strong interagency correlation. Possible causes of ratings failure are separated into informational, analytical, revenue bias, and other incentive problems, each of which is discussed. The paper seeks to highlight methodological developments after the Asian crisis, particularly with regard to the estimation of contingent liabilities and the assessment of international reserves adequacy.
Author | : Nicola Gennaioli |
Publisher | : International Monetary Fund |
Total Pages | : 53 |
Release | : 2014-07-08 |
Genre | : Business & Economics |
ISBN | : 1498391990 |
We analyze holdings of public bonds by over 20,000 banks in 191 countries, and the role of these bonds in 20 sovereign defaults over 1998-2012. Banks hold many public bonds (on average 9% of their assets), particularly in less financially-developed countries. During sovereign defaults, banks increase their exposure to public bonds, especially large banks and when expected bond returns are high. At the bank level, bondholdings correlate negatively with subsequent lending during sovereign defaults. This correlation is mostly due to bonds acquired in pre-default years. These findings shed light on alternative theories of the sovereign default-banking crisis nexus.