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Sovereign Ratings and Investor Behavior

Author

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  • José Jorge

    (Faculdade de Economia, Universidade do Porto, cef.up)

Abstract

Our premise in this paper is that credit rating agencies account for roll-over risk, which in turn depends on credit ratings. Credit ratings influence subjective beliefs and roll-over decisions, which then influence borrower’s creditworthiness and affect credit rating agencies’ pronouncements. These effects are stronger when the borrower is in distress, or when credit ratings are more precise than other sources of financial information. In these cases, rating events have a disproportionate impact on investor behavior, thus making credit quality difficult to assess. We extend our analysis to investigate the role of financial prices, the case in which agencies follow investor opinion, the impact of rating-contingent regulation, and the strategic behavior of credit rating agencies.

Suggested Citation

  • José Jorge, 2016. "Sovereign Ratings and Investor Behavior," CEF.UP Working Papers 1601, Universidade do Porto, Faculdade de Economia do Porto.
    • Handle: RePEc:por:cetedp:1601
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    References listed on IDEAS

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    More about this item

    Keywords

    Keywords: Sovereign ratings; roll-over risk; creditor coordination;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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