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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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  1. 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.
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  6. Reinhart, Carmen, 2002. "Default, currency crises, and sovereign credit ratings," MPRA Paper 13917, University Library of Munich, Germany.
  7. 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.
  8. Richard Cantor & Frank Packer, 1996. "Determinants and impacts of sovereign credit ratings," Research Paper 9608, Federal Reserve Bank of New York.
  9. 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.
  10. Guillermo Larraín & Helmut Reisen & Julia von Maltzan, 1997. "Emerging Market Risk and Sovereign Credit Ratings," OECD Development Centre Working Papers 124, OECD Publishing.
  11. 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.
  12. Arnoud W.A. Boot & Todd T. Milbourn, 2002. "Credit Ratings as Coordination Mechanisms," Tinbergen Institute Discussion Papers 02-058/2, Tinbergen Institute.
  13. Con Keating & Hyun Song Shin & Charles Goodhart & Jon Danielsson, 2001. "An Academic Response to Basel II," FMG Special Papers sp130, Financial Markets Group.
  14. Amar Gande & David Parsley, 2003. "News Spillovers in the Sovereign Debt Market," Working Papers 062003, Hong Kong Institute for Monetary Research.
  15. Roman Kraeussl, 2003. "Sovereign Credit Ratings and Their Impact on Recent Financial Crises," International Finance 0311013, EconWPA.
  16. George-Marios Angeletos & Christian Hellwig & Alessandro Pavan, 2003. "Coordination and Policy Traps," NBER Working Papers 9767, National Bureau of Economic Research, Inc.
  17. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
  18. 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.
  19. 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.
  20. 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.
  21. Mora, Nada, 2006. "Sovereign credit ratings: Guilty beyond reasonable doubt?," Journal of Banking & Finance, Elsevier, vol. 30(7), pages 2041-2062, July.
  22. 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.
  23. Metz, Christina E., 2000. "Private and public information in self-fulfilling currency crises," Research Notes 00-7, Deutsche Bank Research.
  24. 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.).
  25. Allan Drazen, 2000. "Political Contagion in Currency Crises," NBER Chapters, in: Currency Crises, pages 47-67 National Bureau of Economic Research, Inc.
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