Economic freedom and sovereign credit ratings and default risk
Purpose - The purpose of this paper is to show that economic policy impacts sovereign debt risk in addition to economic performance. Design/methodology/approach - Regression analysis was employed to determine the factors that contribute to sovereign bond ratings and bond spreads for a sample of 93 countries from 2000 to 2006. Findings - After controlling for common factors like per capita gross domestic production, growth, and political regime, the results suggest that a two unit (or a 2.4 standard deviation) drop in the economic freedom index represents approximately a 50 percent higher cost of borrowing for a country. Originality/value - The paper contributes to the empirical literature on sovereign credit risk by identifying factors found to be the most significant in determining sovereign credit ratings and bond spreads.
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Volume (Year): 2 (2010)
Issue (Month): 2 (June)
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- Brooks, Robert & Faff, Robert W. & Hillier, David & Hillier, Joseph, 2004. "The national market impact of sovereign rating changes," Journal of Banking & Finance, Elsevier, vol. 28(1), pages 233-250, January.
- Roman Kraeussl, "undated". "Do Changes in Sovereign Credit Ratings Contribute to Financial Contagion in Emerging Market Crises?," Working Papers 0314, University of Crete, Department of Economics.
- Kraeussl, Roman, 2003. "Do Changes in Sovereign Credit Ratings Contribute to Financial Contagion in Emerging Market Crises?," CFS Working Paper Series 2003/22, Center for Financial Studies (CFS).
- Joshua Hall & Robert Lawson, 2009. "Economic Freedom and Peace," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 37(4), pages 445-446, December.
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- Richard Cantor & Frank Packer, 1996. "Determinants and impacts of sovereign credit ratings," Research Paper 9608, Federal Reserve Bank of New York.
- Robert A. Lawson, 2006. "On Testing the Connection Between Economic Freedom and Growth," Econ Journal Watch, Econ Journal Watch, vol. 3(3), pages 398-406, September. Full references (including those not matched with items on IDEAS)
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