Emerging Countries Sovereign Rating Adjustment using Market Information: Impact on Financial Institution Investment Decisions
Assets, debts and other financial products issued by emerging countries are usually considered more speculative than those issued by developed economies. Therefore, relying on traditional rating agencies to invest in these countries is problematic as the information used to assess the economic and market condition in these economies is quickly outdated. Consequently, both the investment opportunities and the necessity to clear particular positions may be missed, respectively resulting in potential significant costs of opportunity or losses. Therefore, an approach taking into account the latest information displayed by financial markets may enable us bypassing the traditional limits. As a result, this chapter proposes a creditworthiness evaluation methodology based on adjusting ratings obtained from macroeconomic fundamentals (GDP growth rate, inflation, external debts, etc.) and financial market movements (bonds, equity volume, volatility, etc). In the first step, a general panel model is applied on country-specific information to generate fundamental ratings. In the second step, applying a multi-factor model to market indicators and breaking down long-term sovereign bond yields into different risk premia, market implied ratings are obtained. Finally, the rating to be considered (denoted “?-Rating”) for investment purposes is a combination of fundamental ratings and market implied ratings carrying out an adapted Bühlmann-Straub method (Credibility Theory). Then, emerging countries “?-Rating” will be compared to those obtained from developed countries and discussed against financial institutions risk appetite.
|Date of creation:||Mar 2013|
|Date of revision:|
|Contact details of provider:|| Postal: 106-112 boulevard de l'Hôpital 75 647 PARIS CEDEX 13|
Phone: + 33 44 07 81 00
Fax: + 33 1 44 07 83 01
Web page: http://centredeconomiesorbonne.univ-paris1.fr/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Michaelides, Alexander & Milidonis, Andreas & Nishiotis, George & Papakyriacou, Panayiotis, 2012.
"Sovereign Debt Rating Changes and the Stock Market,"
CEPR Discussion Papers
8743, C.E.P.R. Discussion Papers.
- Panayiotis Papakyriacou & George Nishiotis & Andreas Milidonis & Alex Michaelides, 2012. "Sovereign Debt Rating Changes and the Stock Market," 2012 Meeting Papers 522, Society for Economic Dynamics.
- Perraudin, William & Taylor, Alex P., 2004. "On the consistency of ratings and bond market yields," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2769-2788, November.
- Baek, In-Mee & Bandopadhyaya, Arindam & Du, Chan, 2005. "Determinants of market-assessed sovereign risk: Economic fundamentals or market risk appetite?," Journal of International Money and Finance, Elsevier, vol. 24(4), pages 533-548, June.
- Constantin Mellios & Eric Paget-Blanc, 2006. "Which factors determine sovereign credit ratings?," The European Journal of Finance, Taylor & Francis Journals, vol. 12(4), pages 361-377.
- Pierre Collin-Dufresne, 2001. "The Determinants of Credit Spread Changes," Journal of Finance, American Finance Association, vol. 56(6), pages 2177-2207, December.
- Gärtner, Manfred & Griesbach, Bjoern & Jung, Florian, 2011.
"PIGS or Lambs? The European Sovereign Debt Crisis and the Role of Rating Agencies,"
Economics Working Paper Series
1106, University of St. Gallen, School of Economics and Political Science.
- Manfred Gärtner & Björn Griesbach & Florian Jung, 2011. "PIGS or Lambs? The European Sovereign Debt Crisis and the Role of Rating Agencies," International Advances in Economic Research, International Atlantic Economic Society, vol. 17(3), pages 288-299, August.
- Alessandro Beber & Michael W. Brandt & Kenneth A. Kavajecz, 2006.
"Flight-to-Quality or Flight-to-Liquidity? Evidence From the Euro-Area Bond Market,"
NBER Working Papers
12376, National Bureau of Economic Research, Inc.
- Alessandro Beber & Michael W. Brandt & Kenneth A. Kavajecz, 2009. "Flight-to-Quality or Flight-to-Liquidity? Evidence from the Euro-Area Bond Market," Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 925-957, March.
- Darrell Duffie & Lasse Heje Pedersen & Kenneth J. Singleton, 2003. "Modeling Sovereign Yield Spreads: A Case Study of Russian Debt," Journal of Finance, American Finance Association, vol. 58(1), pages 119-159, 02.
- repec:kap:iaecre:v:17:y:2011:i:3:p:288-299 is not listed on IDEAS
- G. Ferri & L.-G. Liu & J. E. Stiglitz, 1999. "The Procyclical Role of Rating Agencies: Evidence from the East Asian Crisis," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 28(3), pages 335-355, November.
- Francis A. Longstaff & Jun Pan & Lasse H. Pedersen & Kenneth J. Singleton, 2011.
"How Sovereign Is Sovereign Credit Risk?,"
American Economic Journal: Macroeconomics,
American Economic Association, vol. 3(2), pages 75-103, April.
When requesting a correction, please mention this item's handle: RePEc:mse:cesdoc:13034. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lucie Label)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.