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The Home Bias in Sovereign Ratings

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  • Andreas Fuchs

    (Heidelberg University)

  • Kai Gehring

    (Heidelberg University)

Abstract

Credit rating agencies are frequently criticized for producing biased sovereign ratings. This article discusses how the home country of rating agencies could affect rating decisions as a result of political economy influences and cultural distance. Using data from nine agencies based in six countries, we test whether agencies assign better ratings to their home countries, as well as to countries economically, geopolitically and culturally aligned with them. Our results show biases in favor of the respective home country, culturally more similar countries, and countries in which home‐country banks have a larger risk exposure. Linguistic similarity seems to be the main transmission channel that explains the advantage of the home country.

Suggested Citation

  • Andreas Fuchs & Kai Gehring, 2015. "The Home Bias in Sovereign Ratings," Courant Research Centre: Poverty, Equity and Growth - Discussion Papers 179, Courant Research Centre PEG.
  • Handle: RePEc:got:gotcrc:179
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    More about this item

    Keywords

    Sovereign debt ratings; credit rating agencies; home bias; international finance; cultural distance; bank exposure;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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