DETERMINANTS OF SOVEREIGN BONDS RATINGS: A ROBUSTNESS ANALYSIS

Several studies have attempted to deduce the determinants of sovereign bond ratings. In this study, Extreme Bounds Analysis is applied to approximately 30 factors proposed by the literature in order to assess their robustness with a focus on the relative importance that economic and political variables receive in the shaping of the ratings. We find that policies that constrain the public sector are among the most robust. Variables such as rule of law, openness to economic flows, central bank independence, and market friendly policies are found to be more robustly correlated with the ratings than foreign reserves, fiscal deficit, sovereign bond yields, and economic growth.     

Effects of Booking.com's new scoring system

Booking.com provides a massive database compiling millions of reviews about thousands of accommodations worldwide that hotel managers and academics have extensively consulted during the past decade. In 2019–2020, however, the famous website changed several aspects of its methods of calculating hotel scores, the most important one being a change from its peculiar 2.5–10 scale to a more conventional 1–10 scale. Such novelties may cause changes in hotel scores that do not reflect changes, if any, in customer satisfaction. This article offers an initial investigation into the nature and consequences of those changes that professionals and academics should consider to avoid errors in future studies that involve using Booking. com's database.     

中国信用风险缓释工具创新试点最新进展

信用风险缓释工具（CRM）是2010年我国债券市场最重要的信用风险管理创新工具,它将短期融资券、中期票据等信用类债券的信用风险剥离定价,并转移给愿意承担风险的投资者。本文通过对CRM试点过程中存在的投资主体单一、市场机制不完善及外部环境建设滞后等问题进行了深度剖析,并有针对性地从投资者培育、信用评级与定价、做市商机制、交易信息披露、信用事件处理、以及监管会计税收法律制度建设等方面提出政策建议,以利于CRM市场的可持续发展。     

Existence of Unsolicited Ratings

Rating agencies provide unsolicited ratings voluntarily without the borrowers’ consent. Therefore, the agencies do not get paid for this service. While, supporters of unsolicited ratings argue that voluntary disclosure is done to build reputation, those opposing this practice argue that this leads to financial blackmail. In this paper, we build a model that addresses these issues. We identify the scenarios where rating agencies will provide unsolicited ratings. Finally, we find the welfare effect of unsolicited ratings and suggest policy implications.      

Should more local governments purchase a bond rating?

We investigate whether issuers that choose to forgo a bond rating suffer an interest cost penalty greater than the cost of the rating. We use estimated ratings provided by Moody’s Investor Service to proxy for what the rating would have been if it had been purchased. We find that the primary factors associated with an issuer’s decision to purchase a rating are the rating expected by the issuer and the extent to which an issue is marketed locally. After controlling for self-selection bias, we find that the issuers that forgo a rating do not suffer an interest cost penalty.

The predictive accuracy of credit ratings: Measurement and statistical inference

Credit ratings are ordinal predictions of the default risk of an obligor. The most commonly used measure for evaluating their predictive accuracy is the Accuracy Ratio, or equivalently, the area under the ROC curve. The disadvantages of these measures are that they treat default as a binary variable, thus neglecting the timing of default events, and they fail to use all of the information available from censored observations. We present an alternative measure which is related to the Accuracy Ratio but does not suffer from these drawbacks. As a second contribution, we study statistical inference for the Accuracy Ratio and the proposed measure in the case of multiple cohorts of obligors with overlapping lifetimes. We derive methods which use more sample information and lead to tests which are more powerful than alternatives which filter just the independent part of the dataset. All procedures are illustrated in the empirical section using a dataset of S&P Credit Ratings.     

THE UNDERPINNINGS OF COUNTRY RISK ASSESSMENT

Abstract.  This paper surveys the history and current status of country risk assessment. The motivation is to understand why it is that country risk assessors have such a poor track record in anticipating the onset of financial crises. The development of the field reflects changes in the composition of international capital flows. These changes have confounded a definition of country risk, especially if a definition is centered on a particular event. It is then argued that the field has reached an impasse, and this impasse is related to the methods of abstraction and the current crisis of vision within the science of economics. This crisis of vision, as it pertains to theories of financial crises, has led to increased reliance on quantitative methods in the field of country risk. The paper concludes by proposing a new direction for the field, the first step towards which is to recognize that the object of country risk assessment is not to monitor for a particular event or symptom of financial crisis, but, rather, to monitor for a particular state of the economy.     

Sovereign rating changes—Do they provide new information for stock markets?

The purpose of this paper is to examine the impact of sovereign rating changes on international financial markets using a comprehensive database of 42 countries, covering the major regions in the world over the period 1995–2003. In general, we find that rating agencies provide stock and foreign exchange markets with new tradable information. Specifically, rating upgrades (downgrades) significantly increased (decreased) USD denominated stock market returns and decreased (increased) volatility. Whereas the mean response is contributed evenly by the local currency stock returns and exchange rate changes that make up the USD returns, only the foreign exchange volatility was behind the USD denominated return volatility. In addition, we find significant asymmetric effects of rating announcements. The market responses – both return and volatility – are more pronounced in the cases of downgrades, foreign currency debt, emerging market debt, and during crisis periods. This study has important policy implications for international investors’ asset allocation plans and for regulatory bodies such as the Basel Committee who increasingly rely upon Moody's, Standard and Poor's and Fitch's ratings for their regulatory regimes.     

Cross-cultural differences in upward ratings in a multinational company

Differences between countries in the favourability of upward ratings were examined in a multinational corporation. Data were collected from 6,400 subordinates in ten countries. The results showed that the US and European countries were higher than Brazil and Asian countries on a number of items. A discriminant analysis revealed sets of items that maximally discriminated between groups of countries. The results were interpreted post hoc based on Hofstede's (1984) study of country differences in cultural values. Some results indicated changes in values since Hofstede's data were collected twenty years ago, while others indicated that values in some countries have not changed. The results have implications for calibrating upward feedback and evaluating the need for, and likely effectiveness of, interventions to guide how an organization is managed.     

A coupled Markov chain approach to credit risk modeling

We propose a Markov chain model for credit rating changes. We do not use any distributional assumptions on the asset values of the rated companies but directly model the rating transitions process. The parameters of the model are estimated by a maximum likelihood approach using historical rating transitions and heuristic global optimization techniques.We benchmark the model against a GLMM model in the context of bond portfolio risk management. The proposed model yields stronger dependencies and higher risks than the GLMM model. As a result, the risk optimal portfolios are more conservative than the decisions resulting from the benchmark model.