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Courage to Capital? A Model of the Effects of Rating Agencies on Sovereign Debt Roll–over


  • Galina Hale


With the rise of international bond markets in the 1990s, the role of sovereign credit ratings has become increasingly important. In the aftermath of Asian Crises a series of empirical studies on the effects of sovereign ratings appeared. The theoretical literature on the topic, however, remains rather scarce. We propose a model of rating agencies that is an application of global game theory in which heterogeneous investors act strategically. The model is consistent with the main findings of the empirical literature. In particular, it is able to explain the independent effect of sovereign ratings on the cost of debt. Our model also predicts that, in addition to affecting the level of debt roll–over, the mere existence of the rating agency's announcement can increase the magnitude of the response of capital flows to changes in fundamentals. In addition, introducing a rating agency to a market that otherwise would have the unique equilibrium can bring multiple equilibria. The model also allows us to explore the reasons why agencies may over–react to crises, how they can spread financial contagion, and the failure of rating agencies to predict crises. Classification-F34, G14, G15

Suggested Citation

  • Galina Hale, 2005. "Courage to Capital? A Model of the Effects of Rating Agencies on Sovereign Debt Roll–over," The Institute for International Integration Studies Discussion Paper Series iiisdp062, IIIS.
  • Handle: RePEc:iis:dispap:iiisdp062

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    References listed on IDEAS

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    Cited by:

    1. Dion Bongaerts & K. J. Martijn Cremers & William N. Goetzmann, 2012. "Tiebreaker: Certification and Multiple Credit Ratings," Journal of Finance, American Finance Association, vol. 67(1), pages 113-152, February.
    2. Baum, Christopher F. & Schäfer, Dorothea & Stephan, Andreas, 2016. "Credit rating agency downgrades and the Eurozone sovereign debt crises," Journal of Financial Stability, Elsevier, vol. 24(C), pages 117-131.
    3. Zwart, Sanne, 2007. "The mixed blessing of IMF intervention: Signalling versus liquidity support," Journal of Financial Stability, Elsevier, vol. 3(2), pages 149-174, July.
    4. Bussière, M. & Ristiniemi, A., 2012. "Credit Ratings and Debt Crises," Working papers 396, Banque de France.
    5. repec:mth:ber888:v:7:y:2017:i:1:p:199-226 is not listed on IDEAS
    6. Sanne Zwart, 2005. "Liquidity runs with endogenous information acquisition," Economics Working Papers ECO2005/18, European University Institute.
    7. repec:ebl:ecbull:v:4:y:2007:i:37:p:1-7 is not listed on IDEAS
    8. Christopher F. Baum & Margarita Karpava & Dorothea Schäfer & Andreas Stephan, 2013. "Credit Rating Agency Announcements and the Eurozone Sovereign Debt Crisis," Discussion Papers of DIW Berlin 1333, DIW Berlin, German Institute for Economic Research.
    9. Manfred G?rtner & Bj?rn Griesbach, 2017. "Rating Agencies, Self-Fulfilling Prophecy and Multiple Equilibria? An Empirical Model of the European Sovereign Debt Crisis 2009-2011," Business and Economic Research, Macrothink Institute, vol. 7(1), pages 199-226, June.
    10. Marco Di Maggio, 2007. "Information sharing in emerging credit markets," Economics Bulletin, AccessEcon, vol. 4(37), pages 1-7.

    More about this item


    credit rating; rating agency; sovereign debt; global game;

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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