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Courage to Capital? A Model of the Effects of Rating Agencies on Sovereign Debt Role-over

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Abstract

We propose a model of rating agencies that is an application of global game theory in which heterogeneous investors act strategically. The model allows us to explore the impact of the introduction of a rating agency on financial markets. Our model suggests that the addition of the rating agency affects the probability of default and the magnitude of the response of capital flows to changes in fundamentals in a non–trivial way, and that introducing a rating agency can bring multiple equilibria to a market that otherwise would have the unique equilibrium.

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File URL: http://cowles.econ.yale.edu/P/cd/d15a/d1506.pdf
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Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1506.

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Length: 24 pages
Date of creation: Apr 2005
Date of revision:
Handle: RePEc:cwl:cwldpp:1506

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Postal: Yale University, Box 208281, New Haven, CT 06520-8281 USA
Phone: (203) 432-3702
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Web page: http://cowles.econ.yale.edu/
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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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Keywords: Credit rating; Rating agency; Sovereign debt; Global game;

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References

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  1. 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.
  2. Roman Kraeussl, 2003. "Sovereign Credit Ratings and Their Impact on Recent Financial Crises," Working Papers 0313, University of Crete, Department of Economics.
  3. Reisen, Helmut & von Maltzan, Julia, 1998. "Sovereign credit ratings, emerging market risk and financial market volatility," HWWA Discussion Papers 55, Hamburg Institute of International Economics (HWWA).
  4. Roberto Chang, 2002. "Financial Crises and Political Crises," Departmental Working Papers 200229, Rutgers University, Department of Economics.
  5. Giancarlo Corsetti & Amil Dasgupta & Stephen Morris & Hyun Song Shin, 2004. "Does One Soros Make a Difference? A Theory of Currency Crises with Large and Small Traders," Review of Economic Studies, Wiley Blackwell, vol. 71(1), pages 87-113, 01.
  6. Arnoud W. A. Boot & Todd T. Milbourn, 2002. "Credit Ratings as Coordination Mechanisms," William Davidson Institute Working Papers Series 457, William Davidson Institute at the University of Michigan.
  7. Jeremy A.Rogoff Bulow & Kenneth, 1986. "A Constant Recontracting Model of Sovereign Debt," University of Chicago - George G. Stigler Center for Study of Economy and State 43, Chicago - Center for Study of Economy and State.
  8. Richard Cantor & Frank Packer, 1996. "Determinants and impacts of sovereign credit ratings," Research Paper 9608, Federal Reserve Bank of New York.
  9. Allan Drazen, 2000. "Political Contagion in Currency Crises," NBER Chapters, in: Currency Crises, pages 47-67 National Bureau of Economic Research, Inc.
  10. Metz, Christina E., 2000. "Private and public information in self-fulfilling currency crises," Research Notes 00-7, Deutsche Bank Research.
  11. Carmen M. Reinhart, 2002. "Default, Currency Crises and Sovereign Credit Ratings," NBER Working Papers 8738, National Bureau of Economic Research, Inc.
  12. Bulow, Jeremy & Rogoff, Kenneth, 1989. "Sovereign Debt: Is to Forgive to Forget?," American Economic Review, American Economic Association, vol. 79(1), pages 43-50, March.
  13. Glick, Reuven & Rose, Andrew K., 1999. "Contagion and trade: Why are currency crises regional?," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 603-617, August.
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  15. Amar Gande & David Parsley, 2003. "News Spillovers in the Sovereign Debt Market," Working Papers 062003, Hong Kong Institute for Monetary Research.
  16. George-Marios Angeletos & Christian Hellwig & Alessandro Pavan, 2004. "Coordination and Policy Traps," Levine's Bibliography 122247000000000294, UCLA Department of Economics.
  17. Mora, Nada, 2006. "Sovereign credit ratings: Guilty beyond reasonable doubt?," Journal of Banking & Finance, Elsevier, vol. 30(7), pages 2041-2062, July.
  18. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
  19. Blum, Jurg & Hellwig, Martin, 1995. "The macroeconomic implications of capital adequacy requirements for banks," European Economic Review, Elsevier, vol. 39(3-4), pages 739-749, April.
  20. Guillermo Larraín & Helmut Reisen & Julia von Maltzan, 1997. "Emerging Market Risk and Sovereign Credit Ratings," OECD Development Centre Working Papers 124, OECD Publishing.
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  23. Ferri, Giovanni & Li-Gang Liu & Majnoni, Giovanni, 2000. "How the proposd Basel Guidelines on rating-agency assessments would affect developing countries," Policy Research Working Paper Series 2369, The World Bank.
  24. Con Keating & Hyun Song Shin & Charles Goodhart & Jon Danielsson, 2001. "An Academic Response to Basel II," FMG Special Papers sp130, Financial Markets Group.
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Citations

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Cited by:
  1. Bussière, M. & Ristiniemi, A., 2012. "Credit Ratings and Debt Crises," Working papers 396, Banque de France.
  2. repec:ebl:ecbull:v:4:y:2007:i:37:p:1-7 is not listed on IDEAS
  3. Christopher F. Baum & Margarita Karpava & Dorothea Schäfer & Andreas Stephan, 2013. "Credit Rating Agency Downgrades and the Eurozone Sovereign Debt Crises," Boston College Working Papers in Economics 841, Boston College Department of Economics, revised 30 Jan 2014.
  4. Dion Bongaerts & K. J. Martijn Cremers & William N. Goetzmann, 2012. "Tiebreaker: Certification and Multiple Credit Ratings," Journal of Finance, American Finance Association, vol. 67(1), pages 113-152, 02.
  5. Gärtner, Manfred & Griesbach, Björn, 2012. "Rating agencies, self-fulfilling prophecy and multiple equilibria? An empirical model of the European sovereign debt crisis 2009-2011," Economics Working Paper Series 1215, University of St. Gallen, School of Economics and Political Science.
  6. Baum, Christopher & Karpava, Margarita & Schäfer, Dorothea & Stephan, Andreas, 2013. "Credit Rating Agency Announcements and the Eurozone Sovereign Debt Crises," Ratio Working Papers 224, The Ratio Institute.
  7. Sanne Zwart, 2005. "Liquidity runs with endogenous information acquisition," Economics Working Papers ECO2005/18, European University Institute.
  8. Marco Di Maggio, 2007. "Information sharing in emerging credit markets," Economics Bulletin, AccessEcon, vol. 4(37), pages 1-7.

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