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Do Credit Rating Agencies Add Value? Evidence from the Sovereign Rating Business Institutions

  • Eduardo Cavallo

    ()

  • Andrew Powell

    ()

  • Roberto Rigobon

If rating agencies add no new information to markets, their actions are not a public policy concern. But as rating changes may be anticipated, testing whether ratings add value is not straightforward. This paper argues that ratings and spreads are both noisy signals of fundamentals and suggest ratings add value if, controlling for spreads, they help explain other variables. The paper additionally analyzes the different actions (ratings and outlooks) of the three leading agencies for sovereign debt, also considering the differing effects of more or less anticipated events. The results are consistent across a wide range of tests. Ratings do matter and hence how the market for ratings functions may be a public policy concern.

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File URL: http://www.iadb.org/research/pub_hits.cfm?pub_id=WP-647&pub_file_name=pubWP-647.pdf
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Paper provided by Inter-American Development Bank, Research Department in its series Research Department Publications with number 4601.

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Date of creation: Nov 2008
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Handle: RePEc:idb:wpaper:4601
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  1. Hausman, Jerry A, 1978. "Specification Tests in Econometrics," Econometrica, Econometric Society, vol. 46(6), pages 1251-71, November.
  2. Richard Cantor & Frank Packer, 1996. "Determinants and impacts of sovereign credit ratings," Research Paper 9608, Federal Reserve Bank of New York.
  3. Reinhart, Carmen, 2002. "Default, currency crises, and sovereign credit ratings," MPRA Paper 13917, University Library of Munich, Germany.
  4. Martín González Rozada & Eduardo Levy Yeyati, 2006. "Global Factors and Emerging Market Spreads," IDB Publications (Working Papers) 6703, Inter-American Development Bank.
  5. Andrew W. Lo & A. Craig MacKinlay, 1987. "Stock Market Prices Do Not Follow Random Walks: Evidence From a Simple Specification Test," NBER Working Papers 2168, National Bureau of Economic Research, Inc.
  6. António Afonso & Pedro Gomes & Philipp Rother, 2006. "What “Hides” Behind Sovereign Debt Ratings?," Working Papers Department of Economics 2006/35, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  7. Dell'Ariccia, Giovanni & Schnabel, Isabel & Zettelmeyer, Jeromin, 2006. "How Do Official Bailouts Affect the Risk of Investing in Emerging Markets?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(7), pages 1689-1714, October.
  8. Barry Eichengreen & Ashoka Mody, 2000. "What Explains Changing Spreads on Emerging Market Debt?," NBER Chapters, in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 107-134 National Bureau of Economic Research, Inc.
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