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The Home Bias in Sovereign Ratings

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  • Fuchs , Andreas
  • Gehring , Kai

Abstract

Credit rating agencies are frequently criticized for producing sovereign ratings that do not accurately reflect the economic and political fundamentals of rated countries. This article discusses how the home country of rating agencies could affect rating decisions as a result of political economy influences and culture. Using data from nine agencies based in six countries, we investigate empirically if there is systematic evidence for a home bias in sovereign ratings. Specifically, we use dyadic panel data to test whether, all else being equal, agencies assign better ratings to their home countries, as well as to countries economically, politically and culturally aligned with them. While most of the variation in ratings is explained by the fundamentals of rated countries, our results provide empirical support for the existence of a home bias in sovereign ratings. We find that the bias becomes more accentuated following the onset of the Global Financial Crisis and appears to be driven by economic and cultural ties, not geopolitics.

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  • Fuchs , Andreas & Gehring , Kai, 2013. "The Home Bias in Sovereign Ratings," Working Papers 0552, University of Heidelberg, Department of Economics.
  • Handle: RePEc:awi:wpaper:0552
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    More about this item

    Keywords

    Sovereign debt ratings; credit rating agencies; home bias; international finance; cultural distance; bank exposure;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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