The Home Bias in Sovereign Ratings

University of Heidelberg Department of Economics Discussion Paper Series No. 552

55 Pages Posted: 22 Dec 2013

See all articles by Andreas Fuchs

Andreas Fuchs

University of Goettingen (Gottingen) - Faculty of Economics and Business Administration; Kiel Institute for the World Economy

Kai Gehring

University of Zurich - Chair of Political Economy; Heidelberg University; CESifo

Multiple version iconThere are 3 versions of this paper

Date Written: December 20, 2013

Abstract

Credit rating agencies are frequently criticized for producing sovereign ratings that do not accurately reflect the economic and political fundamentals of rated countries. This article discusses how the home country of rating agencies could affect rating decisions as a result of political economy influences and culture. Using data from nine agencies based in six countries, we investigate empirically if there is systematic evidence for a home bias in sovereign ratings. Specifically, we use dyadic panel data to test whether, all else being equal, agencies assign better ratings to their home countries, as well as to countries economically, politically and culturally aligned with them.

While most of the variation in ratings is explained by the fundamentals of rated countries, our results provide empirical support for the existence of a home bias in sovereign ratings. We find that the bias becomes more accentuated following the onset of the Global Financial Crisis and appears to be driven by economic and cultural ties, not geopolitics.

Keywords: Sovereign debt ratings, credit rating agencies, home bias, international finance,cultural distance, culture, bank exposure

JEL Classification: G24, F34, H63, F65, G15

Suggested Citation

Fuchs, Andreas and Gehring, Kai, The Home Bias in Sovereign Ratings (December 20, 2013). University of Heidelberg Department of Economics Discussion Paper Series No. 552. Available at SSRN: https://ssrn.com/abstract=2370374 or http://dx.doi.org/10.2139/ssrn.2370374

Andreas Fuchs

University of Goettingen (Gottingen) - Faculty of Economics and Business Administration ( email )

Platz der Goettinger Sieben 3
Goettingen, 37073
Germany

Kiel Institute for the World Economy ( email )

Kiellinie 66
Kiel, Schleswig-Hosltein 24105
Germany

Kai Gehring (Contact Author)

University of Zurich - Chair of Political Economy ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland
+4917620916056 (Phone)

HOME PAGE: http://www.kai-gehring.net

Heidelberg University ( email )

Grabengasse 1
Heidelberg, 69117
Germany

CESifo ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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