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Economic freedom and sovereign credit ratings and default risk

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Author Info

  • Saurav Roychoudhury
  • Robert A. Lawson

Abstract

Purpose – The purpose of this paper is to show that economic policy impacts sovereign debt risk in addition to economic performance. Design/methodology/approach – Regression analysis was employed to determine the factors that contribute to sovereign bond ratings and bond spreads for a sample of 93 countries from 2000 to 2006. Findings – After controlling for common factors like per capita gross domestic production, growth, and political regime, the results suggest that a two unit (or a 2.4 standard deviation) drop in the economic freedom index represents approximately a 50 percent higher cost of borrowing for a country. Originality/value – The paper contributes to the empirical literature on sovereign credit risk by identifying factors found to be the most significant in determining sovereign credit ratings and bond spreads.ent into account.

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Bibliographic Info

Article provided by Emerald Group Publishing in its journal Journal of Financial Economic Policy.

Volume (Year): 2 (2010)
Issue (Month): 2 (June)
Pages: 149-162

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Handle: RePEc:eme:jfeppp:v:2:y:2010:i:2:p:149-162

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Web page: http://www.emeraldinsight.com

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Related research

Keywords: Bonds; Borrowing; Fiscal policy; National economy; Risk analysis;

References

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  1. Joshua Hall & Robert Lawson, 2009. "Economic Freedom and Peace," Atlantic Economic Journal, International Atlantic Economic Society, vol. 37(4), pages 445-446, December.
  2. Kraeussl, Roman, 2003. "Do Changes in Sovereign Credit Ratings Contribute to Financial Contagion in Emerging Market Crises?," CFS Working Paper Series 2003/22, Center for Financial Studies (CFS).
  3. Jakob de Haan & Susanna Lundstroem & Jan-Egbert Sturm, 2005. "Market oriented institutions and policies and economic growth: A critical survey," TWI Research Paper Series 5, Thurgauer Wirtschaftsinstitut, Universität Konstanz.
  4. Alexander W. Butler & Larry Fauver, 2006. "Institutional Environment and Sovereign Credit Ratings," Financial Management, Financial Management Association International, vol. 35(3), pages 53-79, 09.
  5. Robert A. Lawson, 2006. "On Testing the Connection between Economic Freedom and Growth," Econ Journal Watch, Econ Journal Watch, vol. 3(3), pages 398-406, September.
  6. Graciela Kaminsky & Sergio L. Schmukler, 2002. "Emerging Market Instability: Do Sovereign Ratings Affect Country Risk and Stock Returns?," World Bank Economic Review, World Bank Group, vol. 16(2), pages 171-195, August.
  7. Berggren, Niclas, 2003. "The Benefits of Economic Freedom: A Survey," Ratio Working Papers 4, The Ratio Institute.
  8. Richard Cantor & Frank Packer, 1996. "Determinants and impact of sovereign credit ratings," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 37-53.
  9. Marshall L. Stocker, 2005. "Equity Returns And Economic Freedom," Cato Journal, Cato Journal, Cato Institute, vol. 25(3), pages 583-594, Fall.
  10. James D . Gwartney & Randall G . Holcombe & Robert A . Lawson, 2006. "Institutions and the Impact of Investment on Growth," Kyklos, Wiley Blackwell, vol. 59(2), pages 255-273, 05.
  11. Gwartney, James & Lawson, Robert, 2003. "The concept and measurement of economic freedom," European Journal of Political Economy, Elsevier, vol. 19(3), pages 405-430, September.
  12. 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.
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Citations

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Cited by:
  1. Blau, Benjamin M. & Brough, Tyler J. & Thomas, Diana W., 2014. "Economic freedom and the stability of stock prices: A cross-country analysis," Journal of International Money and Finance, Elsevier, vol. 41(C), pages 182-196.
  2. Daniel M. Gropper, Robert A. Lawson, and Jere T. Thorne Jr., 2011. "Economic Freedom and Happiness," Cato Journal, Cato Journal, Cato Institute, vol. 31(2), pages 237-255, Spring/Su.
  3. Chortareas, Georgios E. & Girardone, Claudia & Ventouri, Alexia, 2013. "Financial freedom and bank efficiency: Evidence from the European Union," Journal of Banking & Finance, Elsevier, vol. 37(4), pages 1223-1231.

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