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Procyclicality and path dependence of sovereign credit ratings: The example of Europe

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  • Freitag L.

    (GSBE)

Abstract

This paper investigates empirically the behavior of Credit Rating Agencies CRAs when assessingsovereign solvency for European countries. Using Probit regressions I find that even after controllingfor macroeconomic factors, CRAs take the business cycle into account. Also, there is a clear case ofpath dependence in sovereign ratings. Additionally, it turns out that there seems to be a discrepancybetween upgrades and downgrades. These results are robust to a number of different specifications.

Suggested Citation

  • Freitag L., 2014. "Procyclicality and path dependence of sovereign credit ratings: The example of Europe," Research Memorandum 020, Maastricht University, Graduate School of Business and Economics (GSBE).
  • Handle: RePEc:unm:umagsb:2014020
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    File URL: https://cris.maastrichtuniversity.nl/portal/files/816157/content
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    References listed on IDEAS

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    1. Bertrand Candelon & Amadou N Sy & Rabah Arezki, 2011. "Sovereign Rating News and Financial Markets Spillovers; Evidence from the European Debt Crisis," IMF Working Papers 11/68, International Monetary Fund.
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    4. 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.
    5. Candelon, Bertrand & Dumitrescu, Elena-Ivona & Hurlin, Christophe, 2014. "Currency crisis early warning systems: Why they should be dynamic," International Journal of Forecasting, Elsevier, vol. 30(4), pages 1016-1029.
    6. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, March.
    7. Antonio Afonso & Pedro Gomes & Philipp Rother, 2009. "Ordered response models for sovereign debt ratings," Applied Economics Letters, Taylor & Francis Journals, vol. 16(8), pages 769-773.
    8. Berger, Allen N. & Udell, Gregory F., 2004. "The institutional memory hypothesis and the procyclicality of bank lending behavior," Journal of Financial Intermediation, Elsevier, vol. 13(4), pages 458-495, October.
    9. António Afonso & Pedro Gomes & Philipp Rother, 2006. "What “Hides” Behind Sovereign Debt Ratings?," Working Papers Department of Economics 2006/35, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
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    12. Gande, Amar & Parsley, David, 2010. "Sovereign Credit Ratings, Transparency and International Portfolio Flows," MPRA Paper 21118, University Library of Munich, Germany.
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    14. Altman, Edward I. & Rijken, Herbert A., 2004. "How rating agencies achieve rating stability," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2679-2714, November.
    15. 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, Springer;International Atlantic Economic Society, vol. 17(3), pages 288-299, August.
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    17. 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.
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    Cited by:

    1. Freitag L., 2014. "Default probabilities, CDS premiums and downgrades : A probit-MIDAS analysis," Research Memorandum 038, Maastricht University, Graduate School of Business and Economics (GSBE).
    2. repec:ris:buecrj:0397 is not listed on IDEAS
    3. Kerem Tuzcuoglu, 2019. "Composite Likelihood Estimation of an Autoregressive Panel Probit Model with Random Effects," Staff Working Papers 19-16, Bank of Canada.

    More about this item

    Keywords

    International Financial Markets; Investment Banking; Venture Capital; Brokerage; Ratings and Ratings Agencies;

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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