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Sovereign Risk Ratings: Biased Toward Developed Countries?

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  • Derya Gültekin-Karakaş
  • Mehtap Hisarcıklılar
  • Hüseyin Öztürk

Abstract

Sovereign credit ratings are widely used measurements for "country risk" in international capital markets. However, they have been exposed to increasing criticism in the aftermath of the recent global financial crises. Many international authorities proposed new frameworks for the regulation and supervision of the credit rating sector, in which many countries have taken various steps in this respect. Yet the reliability of sovereign credit ratings has not been criticized in the literature. Using random effects ordered probit modeling, this study explores the reliability of credit ratings. Separate analyses of developed and developing countries suggest that the consistency of credit ratings differs by favoring the developed country group.

Suggested Citation

  • Derya Gültekin-Karakaş & Mehtap Hisarcıklılar & Hüseyin Öztürk, 2011. "Sovereign Risk Ratings: Biased Toward Developed Countries?," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 47(0), pages 69-87, May.
  • Handle: RePEc:mes:emfitr:v:47:y:2011:i:0:p:69-87
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    References listed on IDEAS

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    1. Graciela Kaminsky & Sergio L. Schmukler, 2002. "Emerging Market Instability: Do Sovereign Ratings Affect Country Risk and Stock Returns?," World Bank Economic Review, World Bank Group, vol. 16(2), pages 171-195, August.
    2. Bissoondoyal-Bheenick, Emawtee & Brooks, Robert & Yip, Angela Y.N., 2006. "Determinants of sovereign ratings: A comparison of case-based reasoning and ordered probit approaches," Global Finance Journal, Elsevier, vol. 17(1), pages 136-154, September.
    3. Guillaume R. Frechette, 2001. "Random-effects ordered probit," Stata Technical Bulletin, StataCorp LP, vol. 10(59).
    4. Butler, J S & Moffitt, Robert, 1982. "A Computationally Efficient Quadrature Procedure for the One-Factor Multinomial Probit Model," Econometrica, Econometric Society, vol. 50(3), pages 761-764, May.
    5. Jonathan Katz & Emanuel Salinas & Constantinos Stephanou, 2009. "Credit Rating Agencies," World Bank Other Operational Studies 10227, The World Bank.
    6. Hu, Yen-Ting & Kiesel, Rudiger & Perraudin, William, 2002. "The estimation of transition matrices for sovereign credit ratings," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1383-1406, July.
    7. Brewer, Thomas L & Rivoli, Pietra, 1990. "Politics and Perceived Country Creditworthiness in International Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 22(3), pages 357-369, August.
    8. Guillaume R. Frechette, 2001. "Update to random-effects ordered probit," Stata Technical Bulletin, StataCorp LP, vol. 10(61).
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    Cited by:

    1. 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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