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What “hides” behind sovereign debt ratings?

  • Afonso, António
  • Gomes, Pedro
  • Rother, Philipp

In this paper we study the determinants of sovereign debt credit ratings using rating notations from the three main international rating agencies, for the period 1995-2005. We employ panel estimation and random effects ordered probit approaches to assess the explanatory power of several macroeconomic and public governance variables. Our results point to a good performance of the estimated models, across agencies and across the time dimension, as well as a good overall prediction power. Relevant explanatory variables for a country's credit rating are: GDP per capita, GDP growth, government debt, government effectiveness indicators, external debt, external reserves, and default history. JEL Classification: C23, C25, E44, F30, F34, G15, H63

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Paper provided by European Central Bank in its series Working Paper Series with number 0711.

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Date of creation: Jan 2007
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Handle: RePEc:ecb:ecbwps:20070711
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  1. Eliasson, Ann-Charlotte, 2002. "Sovereign credit ratings," Research Notes 02-1, Deutsche Bank Research.
  2. 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.
  3. Helmut Reisen & Julia von Maltzan, 1999. "Boom and Bust and Sovereign Ratings," OECD Development Centre Working Papers 148, OECD Publishing.
  4. Dany Jaimovich & Ugo Panizza, 2010. "Public debt around the world: a new data set of central government debt," Applied Economics Letters, Taylor & Francis Journals, vol. 17(1), pages 19-24, January.
  5. Claudio Borio & Frank Packer, 2004. "Assessing new perspectives on country risk," BIS Quarterly Review, Bank for International Settlements, December.
  6. Alexander W. Butler & Larry Fauver, 2006. "Institutional Environment and Sovereign Credit Ratings," Financial Management, Financial Management Association International, vol. 35(3), pages 53-79, 09.
  7. Christian B. Mulder & Brieuc Monfort, 2000. "Using Credit Ratings for Capital Requirementson Lending to Emerging Market Economies; Possible Impact of a New Basel Accord," IMF Working Papers 00/69, International Monetary Fund.
  8. 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.
  9. Bissoondoyal-Bheenick, Emawtee, 2005. "An analysis of the determinants of sovereign ratings," Global Finance Journal, Elsevier, vol. 15(3), pages 251-280, February.
  10. Guillaume R. Frechette, 2001. "Random-effects ordered probit," Stata Technical Bulletin, StataCorp LP, vol. 10(59).
  11. Guillaume R. Frechette, 2001. "Update to random-effects ordered probit," Stata Technical Bulletin, StataCorp LP, vol. 10(61).
  12. Yannis M. Ioannides & Vassilis A. Hajivassiliou, 2007. "Unemployment and liquidity constraints," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(3), pages 479-510.
  13. António Afonso, 2002. "Understanding the Determinants of Government Debt Ratings: Evidence for the Two Leading Agencies," Working Papers Department of Economics 2002/02, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  14. 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.
  15. Sophia Rabe-Hesketh & Andrew Pickles & Colin Taylor, 2000. "Generalized linear latent and mixed models," Stata Technical Bulletin, StataCorp LP, vol. 9(53).
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