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A random effects ordered probit model for rating migrations

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  • Alsakka, Rasha
  • ap Gwilym, Owain

Abstract

Employing a random effects ordered probit model, this paper examines the sources of heterogeneity in sovereign credit ratings in emerging economies. The analysis uses data from six rating agencies for 90 countries. The model highlights the importance of considering the cross-section error, which captures country-specific heterogeneity, in modelling rating upgrades. Watchlist status is a powerful tool in predicting future rating upgrades/downgrades, and dominates rating momentum in some cases. Rating duration and existing rating are important determinants of rating migrations. Evidence of inter-agency differences and dissimilar behaviour of upgrades and downgrades is presented.

Suggested Citation

  • Alsakka, Rasha & ap Gwilym, Owain, 2010. "A random effects ordered probit model for rating migrations," Finance Research Letters, Elsevier, vol. 7(3), pages 140-147, September.
  • Handle: RePEc:eee:finlet:v:7:y:2010:i:3:p:140-147
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    References listed on IDEAS

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    1. Parnes, Dror, 2007. "Time series patterns in credit ratings," Finance Research Letters, Elsevier, vol. 4(4), pages 217-226, December.
    2. Nickell, Pamela & Perraudin, William & Varotto, Simone, 2000. "Stability of rating transitions," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 203-227, January.
    3. Al-Sakka, Rasha & ap Gwilym, Owain, 2009. "Heterogeneity of sovereign rating migrations in emerging countries," Emerging Markets Review, Elsevier, vol. 10(2), pages 151-165, June.
    4. Bonfim, Diana, 2009. "Credit risk drivers: Evaluating the contribution of firm level information and of macroeconomic dynamics," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 281-299, February.
    5. Fuertes, Ana-Maria & Kalotychou, Elena, 2007. "On sovereign credit migration: A study of alternative estimators and rating dynamics," Computational Statistics & Data Analysis, Elsevier, vol. 51(7), pages 3448-3469, April.
    6. Antonio Afonso & Pedro Gomes & Philipp Rother, 2009. "Ordered response models for sovereign debt ratings," Applied Economics Letters, Taylor & Francis Journals, vol. 16(8), pages 769-773.
    7. Kadam, Ashay & Lenk, Peter, 2008. "Bayesian inference for issuer heterogeneity in credit ratings migration," Journal of Banking & Finance, Elsevier, vol. 32(10), pages 2267-2274, October.
    8. Bangia, Anil & Diebold, Francis X. & Kronimus, Andre & Schagen, Christian & Schuermann, Til, 2002. "Ratings migration and the business cycle, with application to credit portfolio stress testing," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 445-474, March.
    9. Bissoondoyal-Bheenick, Emawtee, 2005. "An analysis of the determinants of sovereign ratings," Global Finance Journal, Elsevier, vol. 15(3), pages 251-280, February.
    10. Lando, David & Skodeberg, Torben M., 2002. "Analyzing rating transitions and rating drift with continuous observations," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 423-444, March.
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    Cited by:

    1. Purificacion Parrado-Martinez & Antonio Parta Ureña & Pilar Gomez Fernandez-Aguado, 2014. "Usefulness of Financial Soundness Indicators for risk assessment: The case of EU member countries," Working Papers 14.01, Universidad Pablo de Olavide, Department of Financial Economics and Accounting (former Department of Business Administration).
    2. Liang, H. & Renneboog, L.D.R., 2013. "The Foundations of Corporate Social Responsibility (replaced by CentER DP 2014-069)," Discussion Paper 2013-071, Tilburg University, Center for Economic Research.
    3. Rasha Alsakka & Owain ap Gwilym, 2010. "Sovereign Ratings and Migrations: Emerging Markets," Working Papers 10009, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    4. Purificación Parrado-Martínez & Antonio Partal-Ureña & Pilar Gómez Fernández-Aguado, 2016. "Banking Soundness Indicators and Sovereign Risk in Time of Crisis: The Case of the European Union," The World Economy, Wiley Blackwell, vol. 39(8), pages 1172-1193, August.
    5. Nie, Peng & Sousa-Poza, Alfonso & Xue, Jianhong, 2016. "Fuel for life: Domestic cooking fuels and women's health in rural China?," Hohenheim Discussion Papers in Business, Economics and Social Sciences 08-2016, University of Hohenheim, Faculty of Business, Economics and Social Sciences.
    6. Huseyin Ozturk*, 2014. "The origin of bias in sovereign credit ratings: reconciling agency views with institutional quality," Journal of Developing Areas, Tennessee State University, College of Business, vol. 48(4), pages 161-188, October-D.

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