The Home Bias in Sovereign Ratings

Courant Research Centre ‘Poverty, Equity and Growth in Developing and Transition Countries' Discussion Paper No. 179

48 Pages Posted: 1 Jul 2015  

Andreas Fuchs

University of Heidelberg - Alfred Weber Institute for Economics

Kai Gehring

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

Multiple version iconThere are 3 versions of this paper

Date Written: June 1, 2015

Abstract

Credit rating agencies are frequently criticized for producing biased sovereign ratings. This article discusses how the home country of rating agencies could affect rating decisions as a result of political economy influences and cultural distance. Using data from nine agencies based in six countries, we test whether agencies assign better ratings to their home countries, as well as to countries economically, geopolitically and culturally aligned with them. Our results show biases in favor of the respective home country, culturally more similar countries, and countries in which home-country banks have a larger risk exposure. Linguistic similarity seems to be the main transmission channel that explains the advantage of the home country.

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

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

Suggested Citation

Fuchs, Andreas and Gehring, Kai, The Home Bias in Sovereign Ratings (June 1, 2015). Courant Research Centre ‘Poverty, Equity and Growth in Developing and Transition Countries' Discussion Paper No. 179. Available at SSRN: https://ssrn.com/abstract=2625090 or http://dx.doi.org/10.2139/ssrn.2625090

Andreas Fuchs (Contact Author)

University of Heidelberg - Alfred Weber Institute for Economics ( email )

Grabengasse 14
Heidelberg, D-69117
Germany

HOME PAGE: http://www.uni-heidelberg.de/fakultaeten/wiso/awi/professuren/intwipol/fuchs_en.html

Kai Gehring

University of Zurich - Chair of Political Economy ( email )

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

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

University of Heidelberg ( email )

Grabengasse 1
Heidelberg, 69117
Germany

Paper statistics

Downloads
146
Rank
11,475
Abstract Views
573