Dissecting the Information Value of Sovereign Credit Rating Reports

52 Pages Posted: 18 Nov 2014 Last revised: 5 Apr 2019

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Vincent Y. S. Chen

National University of Singapore

Geoffrey Sim

Credit Suisse

Weina Zhang

Department of Finance, National University of Singapore; National University of Singapore Risk Management Institute

Date Written: April 4, 2019

Abstract

We dissect the information content of sovereign credit rating reports issued by Moody’s in 62 countries for the period 2003–2013. Using the Naïve Bayesian machine learning algorithm, we classify all sentences in each report into positive and negative tone, as well as six informational categories. We find that the negative tone related to “debt dynamics” affected sovereign credit default swap (CDS) spreads the most, indicating Moody’s specific skill in assessing sovereign credit risk. Moreover, we use a dozen conventional country-level default predictors to separate the tone of each report into “predicted” and “surprise” tone. We find that the negative “surprise” tone caused a bigger market reaction while the negative “predicted” tone is superior in predicting a future downgrade, reflecting different aspects of credit risk assessment. Using the 2009 Eurozone debt crisis as a natural experiment, we find that public confidence in Moody’s financial risk assessment dropped after the crisis afterward. Overall, our study provides new evidence that sovereign credit rating reports contain valuable credit-related information beyond sovereign rating actions.

Keywords: Eurozone Sovereign Debt Crisis, Linguistic Tone, Naïve Bayesian Algorithm, Sovereign Credit Default Swaps, Sovereign Credit Rating Reports

JEL Classification: F3, E6, G2

Suggested Citation

Agarwal, Sumit and Chen, Vincent Y. S. and Sim, Geoffrey and Zhang, Weina, Dissecting the Information Value of Sovereign Credit Rating Reports (April 4, 2019). Available at SSRN: https://ssrn.com/abstract=2526648 or http://dx.doi.org/10.2139/ssrn.2526648

Sumit Agarwal

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Vincent Y. S. Chen

National University of Singapore ( email )

15 Kent Ridge Drive
NUS Business School
Singapore, 119245
Singapore

Geoffrey Sim

Credit Suisse ( email )

Investment Banking
One Raffles Link, #03-01
Singapore, 039393
Singapore

Weina Zhang (Contact Author)

Department of Finance, National University of Singapore ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore
65168120 (Phone)
67792083 (Fax)

HOME PAGE: http://bizfaculty.nus.edu/faculty-profiles/108-weina

National University of Singapore Risk Management Institute ( email )

21 Heng Mui Keng Terrace
Level 4
Singapore, 119613
Singapore

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