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Rating Government Bonds: Can We Raise Our Grade?

  • Marc D. Joffe

Yields on sovereign and municipal bonds are largely determined by perceptions of default risk. The traditional providers of default risk assessments are the credit rating agencies, which have of late suffered damaged reputations. The author, a former Senior Director at Moody’s Analytics, argues that rating agency assessments of government bonds suffer from a failure to use modern social science research methods. He contends that economists and other academics are better suited to the task of estimating the likelihood of government bond defaults. Economists can provide an alternative source of analysis by collecting and analyzing time series of fiscal data and building simulations of future revenues and expenditures. To encourage more academics to enter this field, the author is contributing historical data and an open-source simulation platform.

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Article provided by Econ Journal Watch in its journal Econ Journal Watch.

Volume (Year): 9 (2012)
Issue (Month): 3 (September)
Pages: 350-365

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Handle: RePEc:ejw:journl:v:9:y:2012:i:3:p:350-365
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  1. Jens Hilscher & Yves Nosbusch, 2010. "Determinants of Sovereign Risk: Macroeconomic Fundamentals and the Pricing of Sovereign Debt," Review of Finance, European Finance Association, vol. 14(2), pages 235-262.
  2. Burton G. Malkiel, 2003. "The Efficient Market Hypothesis and Its Critics," Working Papers 111, Princeton University, Department of Economics, Center for Economic Policy Studies..
  3. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
  4. Eli M Remolona & Michela Scatigna & Eliza Wu, 2007. "Interpreting sovereign spreads," BIS Quarterly Review, Bank for International Settlements, March.
  5. 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.
  6. Burton G. Malkiel, 2003. "The Efficient Market Hypothesis and Its Critics," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 59-82, Winter.
  7. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
  8. Donald B. Keim & Robert F. Stambaugh, . "Predicting Returns in the Stock and Bond Markets," Rodney L. White Center for Financial Research Working Papers 15-85, Wharton School Rodney L. White Center for Financial Research.
  9. Lawrence E. Harris & Michael S. Piwowar, 2006. "Secondary Trading Costs in the Municipal Bond Market," Journal of Finance, American Finance Association, vol. 61(3), pages 1361-1397, 06.
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