Determinants and Impact of Sovereign Credit Ratings

Cantor, Richard; Packer, Frank

doi:10.2139/ssrn.1028774

Cited by 324 publications

(326 citation statements)

References 19 publications

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“…This is not necessarily surprising, given that (1) relatively small samples are being used, and (2) at different points in time, the market may focus on different considerations. Even so, both equations explain about 85 percent of the variation in spreads across countries, consistent with other studies- Cantor and Packer (1996), Ammer (1998)-that present estimates of cross-section equations in which ratings variables are not included as explanatory variables.…”

supporting

confidence: 88%

“…Therefore, all the variables in the list except growth and GDP per capita are pre-multiplied by the developing country dummy. 13 These variables are generally similar to those employed in other analyses of the determinants of sovereign spreads, including Cantor and Packer (1996), Cline and Barnes 19 Ecuador (2000). Because these economies were relatively small and their defaults, implicit or explicit, were unlikely to cause serious spillovers to other economies, these cases fed the perception among private investors that only large, systemically important countries were likely to receive large IMF-led bailout packages, i.e., be too big to fail, while smaller countries would have to restructure their debts in the event of trouble.…”

Section: Does Moral Hazard Lead To Discrimination In Favor Of Symentioning

confidence: 71%

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Identifying the Role of Moral Hazard in International Financial Markets

Kamin

2004

International Finance

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Considerable attention has been paid to the possibility that large-scale IMF-led financing packages may have distorted incentives in international financial markets, leading private investors to provide more credit to emerging market countries, and at lower interest rates, than might otherwise have been the case. Yet, prior attempts to identify such distortions have yielded mixed evidence, at best. This paper makes three contributions to our ability to assess the empirical importance of moral hazard in international financial markets. First, it is argued that because large international "bailouts" did not commence until the 1995 Mexican crisis, financial indicators prior to that time could not have reflected a significant degree of this type of moral hazard. Therefore, one test for the existence of moral hazard is that the access of emerging markets to international credit is significantly easier than it was prior to 1995. Second, the paper argues that because private investors expect large-scale IMF-led packages to be extended primarily to economically or geo-politically important countries, moral hazard, if it exists, should lead these countries to have easier terms of access to credit than smaller, nonsystemically important countries. Finally, in addition to looking at bond spreads, the focus of earlier empirical analyses of moral hazard, the paper also examines trends in capital flows to gauge the access of emerging market countries to external finance. Looking at the evidence in light of these considerations, the paper concludes that there is little support for the view that moral hazard is significantly distorting international capital markets at the present time.

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confidence: 88%

Section: Does Moral Hazard Lead To Discrimination In Favor Of Symentioning

confidence: 71%

Identifying the Role of Moral Hazard in International Financial Markets

Kamin

2004

International Finance

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“…Many investors, in particular institutional investors, prefer rated over unrated securities, partly as a result of domestic prudential regulation. And sovereign yields tend to rise as ratings worsen, reflecting the rise in the default risk premium (Cantor and Packer, 1996). The increase in the cost of borrowing, along with the threat of reduced availability of credit, would then provide the incentive for both the public and private sector to abstain from excessive capital inflows.…”

Section: Sovereign Emerging-market Risk and The Rating Industrymentioning

confidence: 99%

“…By reducing the negative Harberger externality, early changes in sovereign ratings could help to impose market-based financial discipline. Cantor and Packer (1996) have recently claimed that "credit ratings appear to have some independent influence on yields over and above their correlation with other publicly available information (p. 34)". This finding would imply that the ratings lead rather than lag the financial markets, by acquiring advance knowledge or superior information that has subsequently been conveyed to market participants.…”

Section: Sovereign Emerging-market Risk and The Rating Industrymentioning

confidence: 99%

Sovereign credit ratings, emerging market risk and financial market volatility

Reisen

Maltzan

1998

Intereconomics

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in IntroductionCredit rating agencies were conspicuous among the many who failed to predict Mexico's economic 1994-95 crisis. While the December 20 devaluation of the peso rocked the world financial markets, until December 22 Standard and Poor's had Mexico's sovereign debt only one step below an investment grade rating with a "positive outlook". TheMexican crisis has thus produced the sentiment that rating agencies react to events rather than anticipating them and raised questions about how seriously investors should take sovereign ratings on developing countries.Our paper aims at broader empirical content for judging whether the two leading rating agencies lead or lag market events with respect to sovereign risk. The evidence will be based on announced as well as implemented ratings of sovereign bonds from the two major rating agencies for up to 49 OECD and non-OECD countries and their impact on yield spreads relative to US treasury bonds and on stock market returns. We go beyond an earlier study (Larrain, Reisen, von Maltzan,1997) by investigating whether credit ratings add to or dampen bond market and emerging stock market volatility.The next section will present a discussion on the potential of the rating industry to attenuate boom-bust cycles with overborrowing in the international capital markets.Section 2 will describe the country sample, the data and the methodology. Section 3 will present the econometric evidence on the interaction of sovereign yield spreads and changes in country ratings. We take three approaches: first, we perform Granger causality tests based on an unbalanced panel data set with yearly observations for the period 1988-95; second, we perform an event study to examine the daily reaction of sovereign yield spreads on rating change announcements and implemented rating changes between 1987 and 1996. For the third approach -also an event study -we use the historical volatility of sovereign bond yield spreads in order to measure country risk perception. Taking into account the strong sensitivity of stock markets towards news, we run the event study likewise for the historical volatility of stock market returns.Section 4 concludes. Sovereign Emerging-Market Risk and the Rating IndustryThe Asian crisis of 1997 and the Mexican crisis of 1994-95 have again demonstrated the vulnerability of emerging-market economies to financial crises associated with the reversal of excessive private capital inflows. The boom-bu...

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“…1 By grouping borrowers into broad categories with similar credit qualities, credit rating provides a first-order approximation of the level of default risk. Numerous studies, such as Cantor and Packer (1996) , have shown that sovereign credit rating reflects the macroeconomic fundamentals of a country and that there are significant variations in sovereign credit spreads across different rating classes. Moreover, rating transition represents a discrete and material change in the credit quality of a borrower.…”

Section: Introductionmentioning

confidence: 99%

A Rating-Based Sovereign Credit Risk Model: Theory and Evidence

Yang

2014

SSRN Journal

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We develop a rating-based continuous-time model of sovereign credit risk with closed-form solutions for a wide range of credit derivatives. In our model, rating transition follows a continuoustime Markov chain, and countries with same credit rating share similar level of default risk. A parsimonious version of our model, with only 16 parameters, one common and one country-specific factor, can simultaneously capture the term structure of CDS spreads of 34 in-sample and 34 outof-sample countries well. On average, the common factor explains more than 60% of the variations of the CDS spreads of both the in-sample and out-of-sample countries, and 80% of the variations of the common factor is explained by the CBOE VIX index, the 5-year US Treasury rate, and the CDX NA IG Index. AbstractWe develop a rating-based continuous-time model of sovereign credit risk with closed-form solutions for a wide range of credit derivatives. In our model, rating transition follows a continuoustime Markov chain, and countries with the same credit rating share a similar level of default risk.A parsimonious version of our model, with only 16 parameters, as well as one common and one country-specific factor, can simultaneously capture the term structure of CDS spreads of 34 insample and 34 out-of-sample countries well. On average, the common factor explains more than 60% of the variations of the CDS spreads of both the in-sample and out-of-sample countries, and 80% of the variations of the common factor is explained by the CBOE VIX index, the 5-year US Treasury rate, and the CDX NA IG Index.

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Determinants and Impact of Sovereign Credit Ratings

Cited by 324 publications

References 19 publications

Identifying the Role of Moral Hazard in International Financial Markets

Identifying the Role of Moral Hazard in International Financial Markets

Sovereign credit ratings, emerging market risk and financial market volatility

A Rating-Based Sovereign Credit Risk Model: Theory and Evidence

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