Sovereign rating actions and the implied volatility of stock index options

This paper examines the interaction between the equity index option market and sovereign credit ratings. S&P and Moody’s signals exhibit strong impact on option-implied volatility while Fitch’s influence is less significant. Moody’s downgrades reduce the market uncertainty over the rated countries’ equity markets. Strong causal relationships are found between movements in the option-implied volatility and all credit signals released by S&P and Fitch, but only actual rating changes by Moody’s, implying differences in rating agencies’ policies. The presence of additional ratings tends to reduce market uncertainty. The findings highlight the importance of rating information in the price discovery process and offer policy implications

Does competition improve sovereign credit rating quality?

Peer reviewedPostprin

Does the disclosure of unsolicited sovereign rating status affect bank ratings?

This paper integrates three themes on regulation, unsolicited credit ratings, and the sovereign-bank rating ceiling. We reveal an unintended consequence of the EU rating agency disclosure rules upon rating changes, using data for S&P-rated banks in 42 countries between 2006 and 2013. The disclosure of sovereign rating solicitation status for 13 countries in February 2011 has an adverse effect on the ratings of intermediaries operating in these countries. Conversion to unsolicited sovereign rating status transmits risk to banks via the rating channel. The results suggest that banks bear a penalty if their host sovereign does not solicit its ratings

The impact of ESMA regulatory identifiers on the quality of ratings

This paper investigates the impact of the introduction of ESMA credit rating identifiers on the quality of ratings. These identifiers form part of the disclosure requirements placed upon credit rating agencies (CRAs) since 2012 under a new EU regulatory regime and have not featured in any prior empirical literature. Rating informativeness is gauged from bond market data. Using a rich dataset of sovereign rating actions by the three major CRAs for 70 countries during the period 2006–2016, we find that the ESMA requirement for identifiers yields varying outcomes across downgrades and upgrades. The rating quality associated with downgrades by Moody's improves, whereas upgrades by S&P, Moody's and Fitch are of lower quality. These results are consistent with greater conservatism in rating policies after the regulatory reforms. ESMA's additional focus on analyst location does not reveal any consistent difference in the quality of ratings

Corporate sensitivity to sovereign credit distress : the mitigating effects of financial flexibility

Acknowledgements We are indebted to the Editor, Associate Editor, and anonymous reviewers for their insightful suggestions.Peer reviewe

Politicians’ connections and sovereign credit ratings

Using a unique hand-collected sample of professional connections between finance ministers and the top executives of the three largest credit rating agencies (CRAs) for 38 European sovereigns between January 2000 and November 2017, we show that professional connections result in higher sovereign ratings. This finding is attributed to ‘favoritism’, which stems from the conflict-of-interest problem in the CRA business model. We also find that the subjective component of ratings, captured by professional connections, has a more pronounced role for developing than developed countries. Our study offers new empirical evidence that unsolicited sovereign ratings are significantly lower than solicited ratings. Our results survive battery of robustness checks including propensity score matching (PSM), two-way fixed-effects, system GMM and various definitions of connection. Our findings offer wide-ranging implications for regulators, governments, market participants and CRAs