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Are Rating Agencies Powerful? An Investigation Into the Impact and Accuracy of Sovereign Ratings

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  • International Monetary Fund

Abstract

We find that Credit Rating Agencies (CRA)''s opinions have an impact in the cost of funding of sovereign issuers and consequently ratings are a concern for financial stability. While ratings produced by the major CRAs perform reasonably well when it comes to rank ordering default risk among sovereigns, there is evidence of rating stability failure during the recent global financial crisis. These failures suggest that ratings should incorporate the obligor''s resilience to stress scenarios. The empirical evidence also supports: (i) reform initiatives to reduce the impact of CRAs'' certification services; (ii) more stringent validation requirements for ratings if they are to be used in capital regulations; and (iii) more transparency with regard to the quantitative parameters used in the rating process.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/23.

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Length: 35
Date of creation: 01 Jan 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/23

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Related research

Keywords: Credit risk; Risk management; Sovereign debt; rating agencies; credit ratings; asian crisis; emerging markets; banking supervision; rating systems; financial crisis; risk metrics; global financial crisis; moral hazard; recession; contagion; risk profiles; market risk; risk assessments; risk premium; risk managers; risk assessment; capital requirements; rating system;

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References

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  1. Jan Annaert & Marc De Ceuster & Patrick Van Roy & Cristina Vespro, 2010. "What determines euro area bank CDS spreads ?," Working Paper Research 190, National Bank of Belgium.
  2. Ingo Fender & John Kiff, 2004. "CDO rating methodology: Some thoughts on model risk and its implications," BIS Working Papers 163, Bank for International Settlements.
  3. Guillermo Larraín & Helmut Reisen & Julia von Maltzan, 1997. "Emerging Market Risk and Sovereign Credit Ratings," OECD Development Centre Working Papers 124, OECD Publishing.
  4. Reisen, Helmut & von Maltzan, Julia, 1999. "Boom and Bust and Sovereign Ratings," International Finance, Wiley Blackwell, vol. 2(2), pages 273-93, July.
  5. Richard Cantor & Frank Packer, 1995. "Sovereign credit ratings," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 1(Jun).
  6. Alsakka, Rasha & ap Gwilym, Owain, 2010. "Leads and lags in sovereign credit ratings," Journal of Banking & Finance, Elsevier, vol. 34(11), pages 2614-2626, November.
  7. Venet, Baptiste & Hurlin, Christophe, 2001. "Granger Causality Tests in Panel Data Models with Fixed Coefficients," Economics Papers from University Paris Dauphine 123456789/6159, Paris Dauphine University.
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Cited by:
  1. Michael Ehrmann & Chiara Osbat & Jan Strasky & Lenno Uusküla, 2013. "The Euro exchange rate during the European sovereign debt crisis – dancing to its own tune?," Bank of Estonia Working Papers wp2013-3, Bank of Estonia, revised 24 May 2013.
  2. Finn Marten Körner & Hans-Michael Trautwein, 2013. "Sovereign Credit Ratings and the Transnationalization of Finance - Evidence from a Gravity Model of Portfolio Investment," ZenTra Working Papers in Transnational Studies 20 / 2013, ZenTra - Center for Transnational Studies, revised Feb 2014.
  3. 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.

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