What If Credit Rating Agencies Were Downgraded? Ratings, Sovereign Debt and Financial Market Volatility

12 Pages Posted: 10 Sep 2011

See all articles by Donato Masciandaro

Donato Masciandaro

Bocconi University - Department of Economics

Date Written: September 2011

Abstract

The activity of Credit Rating Agencies (CRAs) can lead to Excessive Volatility Risk (EVR), adversely affecting issuances of debt by sovereign governments. By EVR, we mean the risk of effects on bond yields, caused by ratings which are independent from the supply of new information (information discovery effect). EVR may depend on two factors: the fact that ratings are embodied into regulation (rating-based regulation effect); the communication policies adopted by CRAs (communication effect). If EVR is to be reduced, on one side it is necessary to eliminate rating-based regulation, and on the other to introduce forms of liability in the communication policies of CRAs.

Suggested Citation

Masciandaro, Donato, What If Credit Rating Agencies Were Downgraded? Ratings, Sovereign Debt and Financial Market Volatility (September 2011). Paolo Baffi Centre Research Paper No. 2011-107. Available at SSRN: https://ssrn.com/abstract=1924859 or http://dx.doi.org/10.2139/ssrn.1924859

Donato Masciandaro (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

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