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Courage to Capital? A Model of the Effects of Rating Agencies on Sovereign Debt Role-over

We propose a model of rating agencies that is an application of global game theory in which heterogeneous investors act strategically. The model allows us to explore the impact of the introduction of a rating agency on financial markets. Our model suggests that the addition of the rating agency affects the probability of default and the magnitude of the response of capital flows to changes in fundamentals in a non–trivial way, and that introducing a rating agency can bring multiple equilibria to a market that otherwise would have the unique equilibrium.

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Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1506.

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Length: 24 pages
Date of creation: Apr 2005
Date of revision:
Handle: RePEc:cwl:cwldpp:1506
Contact details of provider: Postal: Yale University, Box 208281, New Haven, CT 06520-8281 USA
Phone: (203) 432-3702
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Order Information: Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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  1. Arnoud W. A. Boot & Todd T. Milbourn, 2002. "Credit Ratings as Coordination Mechanisms," William Davidson Institute Working Papers Series 457, William Davidson Institute at the University of Michigan.
  2. Giancarlo Corsetti & Amil Dasgupta & Stephen Morris & Hyun Song Shin, 2004. "Does One Soros Make a Difference? A Theory of Currency Crises with Large and Small Traders," Review of Economic Studies, Oxford University Press, vol. 71(1), pages 87-113.
  3. George-Marios Angeletos & Christian Hellwig & Alessandro Pavan, 2004. "Coordination and Policy Traps," Levine's Bibliography 122247000000000294, UCLA Department of Economics.
  4. Jeremy A.Rogoff Bulow & Kenneth, 1986. "A Constant Recontracting Model of Sovereign Debt," University of Chicago - George G. Stigler Center for Study of Economy and State 43, Chicago - Center for Study of Economy and State.
  5. Mora, Nada, 2006. "Sovereign credit ratings: Guilty beyond reasonable doubt?," Journal of Banking & Finance, Elsevier, vol. 30(7), pages 2041-2062, July.
  6. Richard Cantor & Frank Packer, 1996. "Determinants and impacts of sovereign credit ratings," Research Paper 9608, Federal Reserve Bank of New York.
  7. Con Keating & Hyun Song Shin & Charles Goodhart & Jon Danielsson, 2001. "An Academic Response to Basel II," FMG Special Papers sp130, Financial Markets Group.
  8. Guillermo Larraín & Helmut Reisen & Julia von Maltzan, 1997. "Emerging Market Risk and Sovereign Credit Ratings," OECD Development Centre Working Papers 124, OECD Publishing.
  9. Bulow, J. & Rogoff, K., 1988. "Sovereign Debt: Is To Forgive To Forget?," Working papers 8813, Wisconsin Madison - Social Systems.
  10. Ferri, Giovanni & Li-Gang Liu & Majnoni, Giovanni, 2000. "How the proposd Basel Guidelines on rating-agency assessments would affect developing countries," Policy Research Working Paper Series 2369, The World Bank.
  11. Chang, Roberto, 2007. "Financial crises and political crises," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2409-2420, November.
  12. Reuven Glick & Andrew K. Rose, 1998. "Contagion and trade: why are currency crises regional?," Pacific Basin Working Paper Series 98-03, Federal Reserve Bank of San Francisco.
  13. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
  14. Reisen, Helmut & von Maltzan, Julia, 1998. "Sovereign credit ratings, emerging market risk and financial market volatility," HWWA Discussion Papers 55, Hamburg Institute of International Economics (HWWA).
  15. Metz, Christina E., 2000. "Private and public information in self-fulfilling currency crises," Research Notes 00-7, Deutsche Bank Research.
  16. Reinhart, Carmen, 2002. "Default, currency crises, and sovereign credit ratings," MPRA Paper 13917, University Library of Munich, Germany.
  17. Amar Gande & David Parsley, 2003. "News Spillovers in the Sovereign Debt Market," Working Papers 062003, Hong Kong Institute for Monetary Research.
  18. Blum, Jurg & Hellwig, Martin, 1995. "The macroeconomic implications of capital adequacy requirements for banks," European Economic Review, Elsevier, vol. 39(3-4), pages 739-749, April.
  19. Roman Kraeussl, 2003. "Sovereign Credit Ratings and Their Impact on Recent Financial Crises," International Finance 0311013, EconWPA.
  20. 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.
  21. Marcia H. Millon & Anjan V. Thakor, 2004. "Moral Hazard and Information Sharing: A Model of Financial Information Gathering Agencies," Finance 0411024, EconWPA.
  22. Seth B. Carpenter & William C. Whitesell & Egon Zakrajsek, 2001. "Capital requirements, business loans, and business cycles: an empirical analysis of the standardized approach in the new Basel Capital Accord," Finance and Economics Discussion Series 2001-48, Board of Governors of the Federal Reserve System (U.S.).
  23. Allan Drazen, 1999. "Political Contagion in Currency Crises," NBER Working Papers 7211, National Bureau of Economic Research, Inc.
  24. Allen, Franklin, 1990. "The market for information and the origin of financial intermediation," Journal of Financial Intermediation, Elsevier, vol. 1(1), pages 3-30, March.
  25. G. Ferri & L.-G. Liu & J. E. Stiglitz, 1999. "The Procyclical Role of Rating Agencies: Evidence from the East Asian Crisis," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 28(3), pages 335-355, November.
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