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Procyclicality and Path Dependence of Sovereign Credit Ratings: The Example of Europe
Author(s) -
Freitag Lennart
Publication year - 2015
Publication title -
economic notes
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.274
H-Index - 19
eISSN - 1468-0300
pISSN - 0391-5026
DOI - 10.1111/ecno.12032
Subject(s) - solvency , sovereign credit , sovereignty , credit rating , economics , probit model , business cycle , path (computing) , probit , ordered probit , sovereign default , econometrics , credit risk , monetary economics , financial system , business , sovereign debt , actuarial science , macroeconomics , computer science , credit default swap , political science , politics , law , programming language , market liquidity
This paper investigates empirically the behavior of Credit Rating Agencies (CRAs) when assessing sovereign solvency for European countries. Using probit regressions, I find that even after controlling for macroeconomic factors, CRAs take the business cycle into account. Also, there is a clear case of path dependence in sovereign ratings. Additionally, it turns out that there seems to be a discrepancy between upgrades and downgrades. These results are robust to a number of different specifications.