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Leads and lags in sovereign credit ratings

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  • Alsakka, Rasha
  • ap Gwilym, Owain

Abstract

This paper analyses lead-lag relationships in sovereign ratings across five agencies, and finds evidence of interdependence in rating actions. Upgrade (downgrade) probabilities are much higher, and downgrade (upgrade) probabilities are much lower for a sovereign issuer with a recent upgrade (downgrade) by another agency. S&P tends to demonstrate the least dependence on other agencies, and Moody's tends to be the first mover in upgrades. Rating actions by Japanese agencies tend to lag those of the larger agencies, although there is some evidence that they lead Moody's downgrades.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 34 (2010)
Issue (Month): 11 (November)
Pages: 2614-2626

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Handle: RePEc:eee:jbfina:v:34:y:2010:i:11:p:2614-2626

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Web page: http://www.elsevier.com/locate/jbf

Related research

Keywords: Credit rating agencies Sovereign rating Lead-lag relationship Ordered probit model Marginal effects;

References

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  1. Joseph Chen & Harrison Hong & Ming Huang & Jeffrey D. Kubik, 2004. "Does Fund Size Erode Mutual Fund Performance? The Role of Liquidity and Organization," American Economic Review, American Economic Association, vol. 94(5), pages 1276-1302, December.
  2. Amadou N. R. Sy, 2001. "Emerging Market Bond Spreads and Sovereign Credit Ratings: Reconciling Market Views with Economic Fundamentals," IMF Working Papers 01/165, International Monetary Fund.
  3. Nickell, Pamela & Perraudin, William & Varotto, Simone, 2000. "Stability of rating transitions," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 203-227, January.
  4. Hill, Paula & Brooks, Robert & Faff, Robert, 2010. "Variations in sovereign credit quality assessments across rating agencies," Journal of Banking & Finance, Elsevier, vol. 34(6), pages 1327-1343, June.
  5. Amar Gande & David Parsley, 2003. "News Spillovers in the Sovereign Debt Market," Working Papers 062003, Hong Kong Institute for Monetary Research.
  6. Al-Sakka, Rasha & ap Gwilym, Owain, 2009. "Heterogeneity of sovereign rating migrations in emerging countries," Emerging Markets Review, Elsevier, vol. 10(2), pages 151-165, June.
  7. Li, Joanne & Shin, Yoon S. & Moore, William T., 2006. "Reactions of Japanese markets to changes in credit ratings by global and local agencies," Journal of Banking & Finance, Elsevier, vol. 30(3), pages 1007-1021, March.
  8. Elena Kalotychou & Ana-Maria Fuertes, 2006. "On Sovereign Credit Migration: A Study of Alternative Estimators and Rating Dynamics," Computing in Economics and Finance 2006 509, Society for Computational Economics.
  9. Kadam, Ashay & Lenk, Peter, 2008. "Bayesian inference for issuer heterogeneity in credit ratings migration," Journal of Banking & Finance, Elsevier, vol. 32(10), pages 2267-2274, October.
  10. Stolper, Anno, 2009. "Regulation of credit rating agencies," Journal of Banking & Finance, Elsevier, vol. 33(7), pages 1266-1273, July.
  11. Ferreira, Miguel A. & Gama, Paulo M., 2007. "Does sovereign debt ratings news spill over to international stock markets?," Journal of Banking & Finance, Elsevier, vol. 31(10), pages 3162-3182, October.
  12. Livingston, Miles & Naranjo, Andy & Zhou, Lei, 2008. "Split bond ratings and rating migration," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1613-1624, August.
  13. Richard Cantor & Frank Packer, 1996. "Determinants and impacts of sovereign credit ratings," Research Paper 9608, Federal Reserve Bank of New York.
  14. Guttler, Andre & Wahrenburg, Mark, 2007. "The adjustment of credit ratings in advance of defaults," Journal of Banking & Finance, Elsevier, vol. 31(3), pages 751-767, March.
  15. Cantor, Richard & Packer, Frank, 1997. "Differences of opinion and selection bias in the credit rating industry," Journal of Banking & Finance, Elsevier, vol. 21(10), pages 1395-1417, October.
  16. Brooks, Robert & Faff, Robert W. & Hillier, David & Hillier, Joseph, 2004. "The national market impact of sovereign rating changes," Journal of Banking & Finance, Elsevier, vol. 28(1), pages 233-250, January.
  17. Lando, David & Skodeberg, Torben M., 2002. "Analyzing rating transitions and rating drift with continuous observations," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 423-444, March.
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Cited by:
  1. International Monetary Fund, 2012. "Are Rating Agencies Powerful? An Investigation into the Impact and Accuracy of Sovereign Ratings," IMF Working Papers 12/23, International Monetary Fund.
  2. Bussière, M. & Ristiniemi, A., 2012. "Credit Ratings and Debt Crises," Working papers 396, Banque de France.

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