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What “hides” behind sovereign debt ratings?

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

Abstract

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

Suggested Citation

  • Afonso, António & Gomes, Pedro & Rother, Philipp, 2007. "What “hides” behind sovereign debt ratings?," Working Paper Series 711, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:2007711
    Note: 375754
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    credit ratings; Panel data; random effects ordered probit; rating agencies; sovereign debt;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F30 - International Economics - - International Finance - - - General
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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