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A ratings-based approach to measuring sovereign risk

  • Eli M. Remolona

    (Bank for International Settlements, Representative Office for Asia and the Pacific, 78 th Floor, IFC, 8 Finance St, Central, Hong Kong)

  • Michela Scatigna

    (Bank for International Settlements, Representative Office for Asia and the Pacific, 78 th Floor, IFC, 8 Finance St, Central, Hong Kong)

  • Eliza Wu

    (School of Banking and Finance, University of New South Wales, Sydney, NSW #2052, Australia)

We propose a new approach to measuring sovereign default risk. We use sovereign credit ratings and historical default rates provided by credit rating agencies to construct a measure of ratings-implied expected loss. We compare our measure of expected loss from sovereign defaults with stand-alone credit ratings and also examine its relationship with credit default swap spreads. We show that our measure is more informative for measuring sovereign risk. We re-examine the fundamental determinants of sovereign risk and find further evidence to support the debt intolerance and original sin explanations for country risk. This study contributes an improved understanding of the value of sovereign credit rating teams in assessing the long-term country risks accompanying emerging market investments. Copyright © 2007 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/ijfe.357
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Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

Volume (Year): 13 (2008)
Issue (Month): 1 ()
Pages: 26-39

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Handle: RePEc:ijf:ijfiec:v:13:y:2008:i:1:p:26-39
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  4. Kim, Suk-Joong & Wu, Eliza, 2008. "Sovereign credit ratings, capital flows and financial sector development in emerging markets," Emerging Markets Review, Elsevier, vol. 9(1), pages 17-39, March.
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  11. Sy, Amadou N. R., 2002. "Emerging market bond spreads and sovereign credit ratings: reconciling market views with economic fundamentals," Emerging Markets Review, Elsevier, vol. 3(4), pages 380-408, December.
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  15. Marian Micu & Eli M Remolona & Philip D. Wooldridge, 2006. "The price impact of rating announcements: which announcements matter?," BIS Working Papers 207, Bank for International Settlements.
  16. Diaz Weigel, Diana & Gemmill, Gordon, 2006. "What drives credit risk in emerging markets? The roles of country fundamentals and market co-movements," Journal of International Money and Finance, Elsevier, vol. 25(3), pages 476-502, April.
  17. Michael T. Gapen & Dale F. Gray & Cheng Hoon Lim & Yingbin Xiao, 2005. "Measuring and Analyzing Sovereign Risk with Contingent Claims," IMF Working Papers 05/155, International Monetary Fund.
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