Modelling Sovereign Ratings and Transition Probabilities: New Evidence (original) (raw)

The estimation of transition matrices for sovereign credit ratings

Journal of Banking & Finance, 2002

Rating transition matrices for sovereigns are an important input to risk management of portfolios of emerging market credit exposures. They are widely used both in credit portfolio management and to calculate future loss distributions for pricing purposes.

On sovereign credit migration: A study of alternative estimators and rating dynamics

Computational statistics & data analysis (2007) 51, 3448-3483

Different estimators of transition matrices have been proposed in the literature but their behaviour has been studied mainly in the context of corporate ratings. The finite-sample bias and variability of three sovereign credit migration estimators is investigated through bootstrap simulations. These are a discrete multinomial estimator and two continuous-time hazard methods, one of which neglects time heterogeneity in the rating process whereas the other accounts for it. Panel logit models and spectral analysis are utilized to study the properties of the rating process. The sample consists of Moody's ratings 1981-2004 for 72 industrialized and emerging economies. Hazard rate estimators yield more accurate default probabilities. The time homogeneity assumption leads to underestimating the default probability and greater migration risk is inferred upon relaxing it. There is evidence of duration dependence and downgrade momentum effects in the rating process. These findings have important implications for economic and regulatory capital allocation and for the pricing of credit sensitive instruments.

A Ratings Based Approach to Measuring Sovereign Risk

Social Science Research Network, 2007

We propose a new approach to measuring sovereign default risk. We use sovereign credit ratings and historical default rates provided by credit rating agencies to construct a measure of ratings implied expected loss. We compare our measure of expected loss from sovereign defaults with stand-alone credit ratings and also examine its relationship with credit default swap spreads. We show that our measure is more informative for measuring sovereign risk. We reexamine the fundamental determinants of sovereign risk and find further evidence to support the debt intolerance and original sin explanations for country risk. This study contributes an improved understanding of the value of sovereign credit rating teams in assessing the long-term country risks accompanying emerging market investments.

Variations in sovereign credit quality assessments across rating agencies

Journal of Banking & Finance, 2010

We investigate agency variation in credit quality assessment (Standard and Poor's vs. Moody's vs. Fitch) employing sovereign ratings data for 129 countries, spanning the period 1990-2006. While we find that the credit rating agencies often disagree about credit quality, it is usually confined to one or two notches on the finer scale. We find that several variables have varying importance in explaining ratings across agencies which leads us to conclude that material heterogeneity exists between them. Also, while watch and outlook procedures are generally strong predictors of rating changes relative to other public data, additional significant variables suggest that it might be possible to augment these agency data to provide better forecasts of future rating changes.

Evolution of Sovereign Rating Models in the Current Crisis

2014

espanolEn este articulo se aborda el tema de la calificacion de los emisores soberanos por parte de las agencias de rating. Una vez seleccionadas las variables macroeconomicas, que aparecen como mas relevantes en la literatura al uso, se utilizan modelos de regresion lineales multiples donde la variable dependiente es el rating asignado a cada pais por las agencias. Se utiliza un modelo de catorce variables que luego pueden reducirse a cuatro con resultados muy similares en cuanto al ajuste. Se analizan 82 paises en el periodo 2004-2011 y, como resultado, se observa un cambio sustancial respecto a los modelos previos. Esto se debe, en parte, a la incorporacion de una nueva variable cualitativa, la calidad regulatoria, que adquiere un considerable peso en epoca de crisis. portuguesNeste artigo, aborda-se o tema da qualificacao dos emissores soberanos, por parte das agencias de rating. Uma vez selecionadas as variaveis macroeconomicas, que aparecem como mais relevantes na literatura r...

On sovereign ratings: observations and implications

, as much of this note draws on that body of work. I would also like to thank John Chambers (S&P) and Mauro Leos (Moody's) and my IDB colleagues Ed Bartholemew, Eduardo Borensztein and my ex colleague Ugo Panizza for useful discussions on ratings, as well as the participants in the Sovereign Risk Seminar, held at the BIS January 8/9 2013 and particularly Bob McCauley at the BIS for his helpful and constructive suggestions. Remaining mistakes however are my own. All the opinions expressed are solely my own and do not necessarily reflect those of the Inter-American Development Bank, those of its Board of Directors, or those of the countries they represent.

New evidence on sovereign to corporate credit rating spill-overs

International Review of Financial Analysis

We explore what happens to domestic firm-level ratings around the time of a sovereign-rating action on a day-by-day and country-by-country basis. Our granular approach provides banks and investors with a fuller picture of their sovereign credit risk exposure and, as such, our analysis might feed into banks' internal modelling of their credit risk exposure for the purpose of determining regulatory capital, introduced under Basel II. We also provide a novel analysis of any bias in spill-over and we show that, inter alia, the tendency for greater spill-over of negative sovereign-rating actions can largely be accounted for by firm-and sovereign-level factors. However, even after allowing for these factors, some countries suffer from negative bias. The implied higher correlation between sovereign and firm-level ratings in times when countries are in crisis versus when they are in recovery may contribute to quicker and/or deeper crises versus slower and/or longer recoveries.

Rating Transitions and Defaults Conditional on Rating Outlooks Revisited: 1995-2005

2005

Summary In this special comment we revisit the topic of rating outlooks using a new, expanded data set of historical rating outlooks. We re-estimate default and rating migration rates conditional on outlook status as well as re-examine the effects of outlook status on rating accuracy. We also examine the ways in which rating outlooks alter the average relationships between CDS spreads and Moody's credit ratings. The major findings of this study include: • Rating reviews are formal evaluations of an issuer's credit rating, enduring for about 90 days on average. Rating outlooks, which are opinions about the likely direction a credit rating may take over a longer time horizon, last between 12 and 18 months on average. • The majority of rating changes are preceded by rating reviews, although rating reviews have historically been used more intensively for investment-grade issuers than for speculative-grade issuers, and more intensively preceding downgrades than upgrades. • For si...

The national market impact of sovereign rating changes

Journal of Banking & Finance, 2004

This study investigates the aggregate stock market impact of sovereign rating changes. Consistent with evidence pertaining to company credit rating changes, we report that rating downgrades have a negative wealth impact on market returns. Moreover, we find that a downgrade impacts negatively on both the domestic stock market and the dollar value of the coun-tryÕs currency. Interestingly, of the four credit rating agencies examined, only Standard & Poors and Fitch rating downgrades result in significant market falls. Finally, we can find no evidence that emerging markets are particularly sensitive to rating changes or that markets react more severely to multiple rating changes.

Sovereign Credit Rating Determinants Under Financial Crises

SSRN Electronic Journal, 2017

This paper empirically examines the determinants of sovereign credit ratings using panel data on a sample of 86 countries for 1993-2013. It further investigates whether the countries' average credit rating differs by region and for crisis and noncrisis periods, and how the bursting of the dot-com bubble, the Asian crisis, and the 2008 international financial crisis affected the average rating of each region. The estimation results reveal that macroeconomic, external, government, and qualitative factors importantly affect sovereign credit ratings, and that average ratings differ across all geographical regions except for North America and the Eurozone. While the recent crisis reduced the average rating across all regions, the dot-com bubble burst had no effect, the Asian crisis affected only the average rating of Asian countries, and the downgrade resulting from the 2008 crisis was larger in the Eurozone.