Sovereign Ratings and Their Asymmetric Response to Fundamentals

45 Pages Posted: 11 Dec 2014

Date Written: December 10, 2014

Abstract

Changes in sovereign ratings are strongly asymmetric, as downgrades tend to be deeper and faster than upgrades. In other words, once a country loses its initial status it takes a long time to recover it. Using S&P data, we characterise “rating cycles” in terms of their duration and amplitude. We then study whether the agency reaction to new economic and financial domestic information also differs during upgrade and downgrade phases. Our results indicate that favourable fundamentals could be helpful for smoothing and slowing down the path of downgrades, whereas favourable fundamentals do not seem to accelerate the rating recovery.

Keywords: sovereign credit ratings, rating cycle, emerging countries, panel data model

JEL Classification: G24, C33

Suggested Citation

Broto, Carmen and Molina, Luis, Sovereign Ratings and Their Asymmetric Response to Fundamentals (December 10, 2014). Banco de Espana Working Paper No. 1428, Available at SSRN: https://ssrn.com/abstract=2536296 or http://dx.doi.org/10.2139/ssrn.2536296

Carmen Broto (Contact Author)

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Luis Molina

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

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