Article thumbnail

What “Hides” Behind Sovereign Debt Ratings?

By António Afonso, Pedro Gomes and Philipp Rother

Abstract

In this paper we study the determinants of sovereign debt credit ratings using rating notations from the three main international rating agencies, for the period 1995-2005. We employ panel estimation and random effects ordered probit approaches to assess the explanatory power of several macroeconomic and public governance variables. Our results point to a good performance of the estimated models, across agencies and across the time dimension, as well as a good overall prediction power. Relevant explanatory variables for a country's credit rating are: GDP per capita, GDP growth, government debt, government effectiveness indicators, external debt, external reserves, and default history.credit ratings; sovereign debt; rating agencies; panel data; random effects ordered probit.

OAI identifier:

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

Suggested articles

Citations

  1. 2a – Estimated cut-off points 2b- Estimated cut-off points normalized to 1-17
  2. 4c – Ordered Probit 4d – Random effects ordered Probit AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB-
  3. (2006). A Modified Random Effects Estimator for Panel Data Models with Correlated Regressors,
  4. (2003). A non-recursive regression model for country risk rating.
  5. Actual P r e d i c t e d
  6. (2002). Actual P r e d i c t e d Note: observations above (below) the diagonal are predicted by the model above (below) the actual rating.
  7. (2000). Actual P r e d i c t e d Note: observations above (below) the diagonal are predicted by the model above (below) the actual rating. 57 Figure 6 – Random effects estimation including country specific errors
  8. (2004). Additional related studies from the rating agencies are provided by S&P
  9. (2005). An analysis of the determinants of sovereign ratings.
  10. (2004). Assessing new perspectives on country risk. BIS Quarterly Review,
  11. (1999). Boom and Burst and Sovereign Ratings.
  12. C a a 1 0023 8 Actual P r e d i c t e d
  13. (2006). Cross-section 2004, 93 countries Per capita income, debt-to-GDP ratio, inflation, underdevelopment index, legal environment index, legal origin dummies Institutional Investor OLS estimation.
  14. (2006). Default and Recovery Rates of Sovereign Bond Issuers 1983-2005. (available at http://www.moodys.com).
  15. (1996). Determinants and impact of sovereign credit ratings.
  16. (2005). Determinants of sovereign ratings: A comparison of case-based reasoning and ordered probit approaches. Monash Econometrics and Business Statistics Working Papers 9/05,
  17. (2010). e d i c t e d Note: observations above (below) the diagonal are predicted by the model above (below) the actual rating.
  18. (2002). Econometric Analysis of Cross Section
  19. Fitch rating systems Differences in notches S&PMoody’s S&PFitch
  20. (2006). Fitch sovereign ratings transition and default study.
  21. (1996). Hausman test was done excluding External Debt, as it was highly non-significant and seemed correlated with the errors in this particular sample. 40 Table 8 – Estimations for S&P: two sub-periods Pooled OLS Random Effects Fixed Effects
  22. (2006). Institutional Environment and Sovereign Credit Ratings. Financial Management (forthcoming).
  23. (2004). Macroeconomics and Sovereign Risk Ratings,
  24. Note: Data as of year-end (June for 2006). 53 Figure 2 – Random effects ordered probit cut-off points for the three agencies
  25. (1996). Reference Data Explanatory variables Agencies Methodology Cantor and Packer
  26. (1998). S&P BB- (5) BB- (5) BBB- (8) A- (11) BB (6) BBB (9) BBB- (8) BBB+ (10) BB+ (7) BBB+ (10) R a t i n g $ Fitch B+ (4) BB- (5) BB (6) A- (11) BB (6) BBB (9) BB+ (7) BBB+ (10) BB (6) BBB+ (10) Macro contribution -0.59
  27. (2000). sg120: Generalized linear latent and mixed models.
  28. (2001). sg158: Random-effects ordered probit,
  29. (2001). sg158.1: Update to random-effects ordered probit,
  30. (2002). Sovereign credit ratings. Working Papers 02-1, Deutsche Bank.
  31. (2004). Sovereign Defaults Set to Fall Again in
  32. (2002). The estimation of transition matrices for sovereign credit ratings.
  33. (2005). The EU Premium: Ratings Strengthened for Countries Moving Toward EMU Convergence, Moody’s Special Comment, Moody’s Investors Service,
  34. (2006). Transition Data for Rated Sovereigns. (available at http://www2.standardandpoors.com).
  35. (2003). Understanding the determinants of sovereign debt ratings: evidence for the two leading agencies.
  36. (2006). Unemployment and Liquidity Constraints.
  37. (2000). Using credit ratings for capital requirements on lending to emerging market economies - possible impact of a new Basel accord. IMF Working Papers 00/69.