Emerging Countries Sovereign Rating Adjustment using Market Information: Impact on Financial Institution Investment Decisions
AbstractAssets, debts and other financial products issued by emerging countries are usually considered more speculative than those issued by developed economies. Therefore, relying on traditional rating agencies to invest in these countries is problematic as the information used to assess the economic and market condition in these economies is quickly outdated. Consequently, both the investment opportunities and the necessity to clear particular positions may be missed, respectively resulting in potential significant costs of opportunity or losses. Therefore, an approach taking into account the latest information displayed by financial markets may enable us bypassing the traditional limits. As a result, this chapter proposes a creditworthiness evaluation methodology based on adjusting ratings obtained from macroeconomic fundamentals (GDP growth rate, inflation, external debts, etc.) and financial market movements (bonds, equity volume, volatility, etc). In the first step, a general panel model is applied on country-specific information to generate fundamental ratings. In the second step, applying a multi-factor model to market indicators and breaking down long-term sovereign bond yields into different risk premia, market implied ratings are obtained. Finally, the rating to be considered (denoted “?-Rating”) for investment purposes is a combination of fundamental ratings and market implied ratings carrying out an adapted Bühlmann-Straub method (Credibility Theory). Then, emerging countries “?-Rating” will be compared to those obtained from developed countries and discussed against financial institutions risk appetite.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne in its series Documents de travail du Centre d'Economie de la Sorbonne with number 13034.
Length: 29 pages
Date of creation: Mar 2013
Date of revision:
Contact details of provider:
Postal: 106-112 boulevard de l'Hôpital 75 647 PARIS CEDEX 13
Phone: + 33 44 07 81 00
Fax: + 33 1 44 07 83 01
Web page: http://centredeconomiesorbonne.univ-paris1.fr/
More information through EDIRC
Credit risk; rating; Panel model; multi-factor regression; credibility theory.;
Find related papers by JEL classification:
- G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
- C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-05-11 (All new papers)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Francis A. Longstaff & Jun Pan & Lasse H. Pedersen & Kenneth J. Singleton, 2007.
"How Sovereign is Sovereign Credit Risk?,"
NBER Working Papers
13658, National Bureau of Economic Research, Inc.
- Alessandro Beber & Michael W. Brandt & Kenneth A. Kavajecz, 2006.
"Flight-to-Quality or Flight-to-Liquidity? Evidence From the Euro-Area Bond Market,"
NBER Working Papers
12376, National Bureau of Economic Research, Inc.
- Alessandro Beber & Michael W. Brandt & Kenneth A. Kavajecz, 2009. "Flight-to-Quality or Flight-to-Liquidity? Evidence from the Euro-Area Bond Market," Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 925-957, March.
- Gärtner, Manfred & Griesbach, Bjoern & Jung, Florian, 2011.
"PIGS or Lambs? The European Sovereign Debt Crisis and the Role of Rating Agencies,"
Economics Working Paper Series
1106, University of St. Gallen, School of Economics and Political Science.
- Manfred Gärtner & Björn Griesbach & Florian Jung, 2011. "PIGS or Lambs? The European Sovereign Debt Crisis and the Role of Rating Agencies," International Advances in Economic Research, Springer, vol. 17(3), pages 288-299, August.
- Michaelides, Alexander & Milidonis, Andreas & Nishiotis, George & Papakyriacou, Panayiotis, 2012.
"Sovereign Debt Rating Changes and the Stock Market,"
CEPR Discussion Papers
8743, C.E.P.R. Discussion Papers.
- Panayiotis Papakyriacou & George Nishiotis & Andreas Milidonis & Alex Michaelides, 2012. "Sovereign Debt Rating Changes and the Stock Market," 2012 Meeting Papers 522, Society for Economic Dynamics.
- Baek, In-Mee & Bandopadhyaya, Arindam & Du, Chan, 2005. "Determinants of market-assessed sovereign risk: Economic fundamentals or market risk appetite?," Journal of International Money and Finance, Elsevier, vol. 24(4), pages 533-548, June.
- Pierre Collin-Dufresne, 2001. "The Determinants of Credit Spread Changes," Journal of Finance, American Finance Association, vol. 56(6), pages 2177-2207, December.
- Darrell Duffie & Lasse Heje Pedersen & Kenneth J. Singleton, 2003. "Modeling Sovereign Yield Spreads: A Case Study of Russian Debt," Journal of Finance, American Finance Association, vol. 58(1), pages 119-159, 02.
- Perraudin, William & Taylor, Alex P., 2004. "On the consistency of ratings and bond market yields," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2769-2788, November.
- Constantin Mellios & Eric Paget-Blanc, 2006. "Which factors determine sovereign credit ratings?," The European Journal of Finance, Taylor & Francis Journals, vol. 12(4), pages 361-377.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lucie Label).
If references are entirely missing, you can add them using this form.