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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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File URL: http://cowles.yale.edu/sites/default/files/files/pub/d15/d1506.pdf
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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
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Web page: http://cowles.yale.edu/

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  1. Bulow, Jeremy & Rogoff, Kenneth, 1989. "A Constant Recontracting Model of Sovereign Debt," Journal of Political Economy, University of Chicago Press, vol. 97(1), pages 155-78, February.
  2. George-Marios Angeletos & Christian Hellwig & Alessandro Pavan, 2003. "Coordination and Policy Traps," NBER Working Papers 9767, National Bureau of Economic Research, Inc.
  3. Jeremy Bulow & Kenneth Rogoff, 1998. "Sovereign Debt: Is to Forgive to Forget," Levine's Working Paper Archive 209, David K. Levine.
  4. 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.).
  5. Richard Cantor & Frank Packer, 1996. "Determinants and impact of sovereign credit ratings," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 37-53.
  6. 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.
  7. Millon, Marcia H & Thakor, Anjan V, 1985. " Moral Hazard and Information Sharing: A Model of Financial Information Gathering Agencies," Journal of Finance, American Finance Association, vol. 40(5), pages 1403-22, December.
  8. 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.
  9. Gande, Amar & Parsley, David C., 2005. "News spillovers in the sovereign debt market," Journal of Financial Economics, Elsevier, vol. 75(3), pages 691-734, March.
  10. Reisen, Helmut & Von Maltzan, Julia & Larraín, Guillermo, 1998. "Emerging market risk and sovereign credit ratings," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 34380, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
  11. Roman Kraeussl, 2003. "Sovereign Credit Ratings and Their Impact on Recent Financial Crises," Working Papers 0313, University of Crete, Department of Economics.
  12. Corsetti, Giancarlo & Dasgupta, Amil & Morris, Stephen & Shin, Hyun Song, 2000. "Does One Soros Make a Difference? A Theory of Currency Crises with Large and Small Traders," CEPR Discussion Papers 2610, C.E.P.R. Discussion Papers.
  13. Allan Drazen, 1999. "Political Contagion in Currency Crises," NBER Working Papers 7211, National Bureau of Economic Research, Inc.
  14. 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.
  15. Reuven Glick & Andrew K. Rose, 1998. "Contagion and Trade: Why Are Currency Crises Regional?," NBER Working Papers 6806, National Bureau of Economic Research, Inc.
  16. 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.
  17. Roberto Chang, 2002. "Financial Crises and Political Crises," Departmental Working Papers 200229, Rutgers University, Department of Economics.
  18. Helmut Reisen & Julia Maltzan, 1998. "Sovereign credit ratings, emerging market risk and financial market volatility," Intereconomics: Review of European Economic Policy, Springer;German National Library of Economics;Centre for European Policy Studies (CEPS), vol. 33(2), pages 73-82, March.
  19. Con Keating & Hyun Song Shin & Charles Goodhart & Jon Danielsson, 2001. "An Academic Response to Basel II," FMG Special Papers sp130, Financial Markets Group.
  20. Metz, Christina E., 2000. "Private and public information in self-fulfilling currency crises," Research Notes 00-7, Deutsche Bank Research.
  21. Carmen M. Reinhart, 2002. "Default, Currency Crises and Sovereign Credit Ratings," NBER Working Papers 8738, National Bureau of Economic Research, Inc.
  22. 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.
  23. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
  24. Mora, Nada, 2006. "Sovereign credit ratings: Guilty beyond reasonable doubt?," Journal of Banking & Finance, Elsevier, vol. 30(7), pages 2041-2062, July.
  25. 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.
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