Journal of Banking & Finance Vol. 88 2018
Subjectivity in sovereign credit ratings
Abstract
A sovereign creditrating is a function of hard and soft information that should reflect the creditworthiness and the probability of default of a country. We propose an alternative characterisation for the subjective component of a sovereign credit rating – the parts related to the ratee’s lobbying effort or its familiarity from a United States point of view – and apply it to S&P, Moody’s and Fitch ratings, using both traditional ordered-logit panel models and machine learning techniques. This subjective component turns out to be large, especially for the low-rated countries. Countries that are rated as investment grade tend to be positively influenced by it, and vice versa. Subjective judgment in credit ratings does have predictive value: it helps in identifying chances of sovereign defaults in the short-term. Still, the impact of subjectivity in sovereign ratings on borrowing costs is very limited on average.
- DOI
- 10.1016/j.jbankfin.2017.12.014
- Volume
- 88
- Pages
- 366-392
- Language
- en
- Sources
- openalex crossref bibtex:phds-export.bib