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Risk, ambiguity and sovereign rating

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  • Di Caro, Paolo

Abstract

Decisions of investing in sovereign assets involve both risk and ambiguity. Ambiguity arises from unknown elements characterizing the value of a generic sovereign. In presence of ambiguity, ambiguity-averse investors are prone to pay for obtaining summary information such as ratings which reduces ambiguity. Ambiguity-neutral and ambiguity-averse investors, then, make decisions on the basis of different informative sources. By presenting a simple model of sovereign rating under ambiguity, three facts occurring in today’s financial markets are explained. Sovereign ratings influence decisions of investment of ambiguity-sensitive individuals. Rating-dependent regulations create distortions in financial markets by institutionalising specific summary signals. Providing ratings may be a profitable activity. Some final suggestions propose future areas of theoretical and empirical research.

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  • Di Caro, Paolo, 2014. "Risk, ambiguity and sovereign rating," MPRA Paper 60295, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:60295
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    References listed on IDEAS

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    More about this item

    Keywords

    risk; ambiguity; ambiguity aversion; sovereign rating; value of information;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G1 - Financial Economics - - General Financial Markets

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