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DO CREDIT RATING AGENCIES ADD VALUE? EVIDENCE FROM THE SOVEREIGN RATING BUSINESS
Author(s) -
Cavallo Eduardo,
Powell Andrew,
Rigobon Roberto
Publication year - 2013
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.1461
Subject(s) - credit rating , economics , sovereign credit , bond credit rating , sovereign debt , sovereignty , value (mathematics) , variety (cybernetics) , emerging markets , debt , financial economics , credit risk , financial system , actuarial science , credit reference , macroeconomics , credit default swap , political science , statistics , politics , law , mathematics
The debt crisis in several European Union nations has resulted in a set of downgrades in sovereign ratings, sparking a lively debate whether these opinions actually matter. Ratings and bond spreads may both be considered as noisy signals of fundamentals. Ratings only add value if, controlling for spreads and observable country fundamentals, they help explain other market variables. We employed a unique dataset of over 75 000 daily observations on emerging countries around rating actions by the three major agencies. We found that ratings do indeed add information, and this finding is robust to a variety of different tests. Copyright © 2012 John Wiley & Sons, Ltd.