Location of Repository

Do Credit Rating Agencies Add Value? Evidence from the Sovereign Rating Business Institutions

By Eduardo Cavallo, Andrew Powell and Roberto Rigobon

Abstract

If rating agencies add no new information to markets, their actions are not a public policy concern. But as rating changes may be anticipated, testing whether ratings add value is not straightforward. This paper argues that ratings and spreads are both noisy signals of fundamentals and suggest ratings add value if, controlling for spreads, they help explain other variables. The paper additionally analyzes the different actions (ratings and outlooks) of the three leading agencies for sovereign debt, also considering the differing effects of more or less anticipated events. The results are consistent across a wide range of tests. Ratings do matter and hence how the market for ratings functions may be a public policy concern.

OAI identifier:

Suggested articles

Preview

Citations

  1. (1996). Determinants and Impact of
  2. (2006). Global Factors and Emerging Market Spreads.” Research Department Working Paper 552. Washington, DC, United States: Inter-American Development Bank.
  3. (2006). How Do Official Bailouts Affect the Risk of Investing in Emerging Markets?”
  4. (2007). On Emerging Economy Sovereign Spreads and Ratings.” Research Department Working Paper 629. Washington, DC, United States: InterAmerican Development Bank.
  5. (1978). Specification Tests in
  6. (1988). Stock Market Prices Do Not Follow Random Walks: Evidence from a Simple Specification Test.”
  7. (1997). The Econometrics of Financial Markets. Princeton, United States:
  8. (1998). What Explains Changing Spreads on Emerging-Market Debt: Fundamentals Or Market Sentiment?” NBER Working Paper 6408. Cambridge, United States: National Bureau of Economic Research.

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.