1. bookVolume 5 (2016): Issue 3 (September 2016)
Journal Details
License
Format
Journal
eISSN
2336-9205
First Published
11 Mar 2014
Publication timeframe
3 times per year
Languages
English
Open Access

Does Central Bank Quality Determine Sovereign Ratings and Credit Default Swap Spreads: Evidence from the World?

Published Online: 23 Sep 2016
Volume & Issue: Volume 5 (2016) - Issue 3 (September 2016)
Page range: 5 - 29
Received: 02 Oct 2015
Accepted: 10 Jan 2016
Journal Details
License
Format
Journal
eISSN
2336-9205
First Published
11 Mar 2014
Publication timeframe
3 times per year
Languages
English
Abstract

This study innovates from prior research which focuses on the determinants of sovereign ratings and credit default swap spreads for a large sample of countries by incorporating the quality of central banks, let alone refined proxies. Findings show that the explanatory power of both sovereign ratings and CDS spreads model improve by a hefty 11 percent in case of sovereign ratings and 6 to 9 percent in the case of CDS spreads when central bank quality is incorporated. Such a finding bolters the notion that institutional quality does play a preponderant role when it comes to assessing country risk, making it a systematic component of institutional quality. The effect of labour participation implies that countries buffeted by stronger effects of an ageing population have greater propensity of increases in CDS spreads. Evidence is also found as to the driving dynamics of CDS spreads and sovereign ratings to be distinct. Our results hold robust post tackling for endogeneity problem.

Keywords

JEL

1. Afonso, A., 2003. Understanding the determinants of sovereign debt ratings: evident for the two leading agencies. Journal of Economics and Finance 27 (1), 56-74.10.1007/BF02751590Search in Google Scholar

2. Afonso, A., P. Gomes, and Rother, P. (2007). What hides behind sovereign debt ratings?, ECB WorkingPaper Series, 711, January.10.2139/ssrn.954705Search in Google Scholar

3. Afonso, A., Gomes, P., 2011. Do fiscal imbalances deteriorate sovereign debt ratings? Revue Économique 62 (6).10.3917/reco.626.1123Search in Google Scholar

4. Afonso, A., Furceri, D. and Gomes, P. (2012). Sovereign credit ratings and financial markets linkages: Application to European data. Journal of International Money and Finance, 21, pp. 606-638.10.1016/j.jimonfin.2012.01.016Search in Google Scholar

5. Alesina, A., De Broeck, M., Prati, A. andTabellini, G., 1992. Default risk on government debt in OECD countries. Economic Policy 15, pp. 428-463.10.2307/1344548Search in Google Scholar

6. Alsakka, R. and O. Gwilym (2010). Leads and lags in sovereign credit ratings, Journal of Banking and Finance. 34: 2614-2626.Search in Google Scholar

7. Damodaran, A. (2014). Website available at: [http://pages.stern.nyu.edu/~adamodar/]Search in Google Scholar

8. Bayoumi, T., Goldstein, M., and Woglom, G., 1995. Do credit markets discipline sovereign borrowers? Evidence from US states. Journal of Money Credit and Banking 27, pp. 1046-1059.10.2307/2077788Search in Google Scholar

9. Bissoondoyal-Bheenick., E. (2005). An Analysis of the Determinants of Sovereign Ratings. Global Finance Journal 15, pp. 251-280.10.1016/j.gfj.2004.03.004Search in Google Scholar

10. Bozic, V. and Magazzino, C. (2013). Credit Rating Agencies: The Importance of Fundamentals in the Assessment of Sovereign Ratings. Economic Analysis and Policy, Vol. 43, No. 2, pp. 157-176.10.1016/S0313-5926(13)50016-6Search in Google Scholar

11. Bulow, J. and K. Rogoff (1988). Sovereign Debt Restructurings: Panacea or Pangloss?, NBER WorkingPapers, 2637.10.3386/w2637Search in Google Scholar

12. Butler, A. W. and Fauver, L. (2006). Institutional Environment and Sovereign Credit Ratings. Financial Management, Vol. 35, No. 3, pp. 53-79.10.1111/j.1755-053X.2006.tb00147.xSearch in Google Scholar

13. Cantor, R., and Packer, F. (1996). Determinants and impact of sovereign credit rating. Federal Reserve Bank of New York Economic Policy Review, (October), 1-15.Search in Google Scholar

14. Cavallo, E. A., and Valenzuela, P. (2010). The determinants of corporate risk in emerging markets: An option-adjusted spread analysis. International Journal of Finance and Economics, 15, 59-74.Search in Google Scholar

15. Eaton, J., and Fernandez, R. (1995). Sovereign debt. NBER working paper 5131.10.3386/w5131Search in Google Scholar

16. Eaton, J., Gersovitz, M., and Stiglitz, J. (1986). The pure theory of country risk. European Economic Review, 30, 481-513.10.1016/0014-2921(86)90004-8Search in Google Scholar

17. Edwards, S. (1986). The Pricing of Bonds and Bank Loans in International Markets, An Empirical Analysis of Developing Countries’ Foreign Borrowing, European Economic Review 30, 565-589.10.1016/0014-2921(86)90009-7Search in Google Scholar

18. Eichengreen, B. and Mody, A. (1998). What Explains Changing Spreads on Emerging-Market Debt:Fundamentals or Market Sentiment?, NBER Working Paper, 6408.10.3386/w6408Search in Google Scholar

19. Eichengreen, B., andMody, A. (2000). What explains changing spreads on emerging-market debt: Fundamentals or market sentiment. In S. Edwards (Ed.), Capital flows and the emerging economies: Theory, evidence and controversies. University of Chicago Press.Search in Google Scholar

20. Erdem, O. and Varli, Y. (2014). Understanding the sovereign credit ratings of emerging markets. Emerging Markets Review 20, pp. 42-57.10.1016/j.ememar.2014.05.004Search in Google Scholar

21. Ferri, G., Liu, L. and Stiglitz, J.E. (1999). The Procyclical Role of Rating Agencies: Evidence from the East Asian Crisis. Economic Notes, Vol. 28, No. 3, pp. 335-355.10.1111/1468-0300.00016Search in Google Scholar

22. González-Rozada, M. and Yeyati, E. L. (2008), Global Factors and Emerging Market Spreads. The Economic Journal, 118, pp.1917-1936.10.1111/j.1468-0297.2008.02196.xSearch in Google Scholar

23. Guttler, A. and Wahrenburg, M. (2007). The adjustment of credit ratings in advance of defaults, Journal of Banking and Finance,31, pp. 751-767.Search in Google Scholar

24. Hartelius, K., Kashiwase, K. and Kodres, L.E. (2008). Emerging Market Spread Compression: Is it Real or is it Liquidity?. IMF Working Paper 08/10.10.2139/ssrn.1087180Search in Google Scholar

25. Hill, P., Brooks, R., Faff, R., 2010. Variations in sovereign credit quality assessments across rating agencies. Journal of Banking and Finance 34 (6), 1327-1343.10.1016/j.jbankfin.2009.11.028Search in Google Scholar

26. Jaramillo, L., Tejada, M. (2011). Sovereign credit ratings and spreads in emerging markets: does investment grade matter? IMF Working Papers, pp. 1-17.Search in Google Scholar

27. Kaminsky, G. and S. Schmukler. (2002). Emerging market Instability: Do Sovereign Ratings Affect Country Risk and Stock Returns? The World Bank Economic Review, Vol. 16, No. 2, pp. 171-195.Search in Google Scholar

28. Klein, C. and Stellner, C. (2014). Does sovereign risk matter? New evidence from eurozone corporate bond ratings and zero-volatility spreads. Review of Financial Economics, 23, pp. 64-74.10.1016/j.rfe.2013.08.006Search in Google Scholar

29. Maltritz, D. (2012). Determinants of sovereign yield spreads in the Eurozone: A Bayesian approach. Journal of International Money and Finance, 31, 657-672.10.1016/j.jimonfin.2011.10.010Search in Google Scholar

30. Maltritz, D., &Molchanov, A. (2014). Country credit risk determinants with model uncertainty. International Review of Economics and Finance, 29, 224-234.10.1016/j.iref.2013.05.018Search in Google Scholar

31. Min, H. (1998). Determinants of emerging market bond spread: Do economic fundamentals matter? World Bank policy research working paper 1899.10.1596/1813-9450-1899Search in Google Scholar

32. Oliveira, L., Curto, J.D., and Nunes, J.D. (2012). The determinants of sovereign credit spread changes in the Euro-zone. Journal of International Financial Markets, Institutions and Money, 22, pp. 278-304.10.1016/j.intfin.2011.09.007Search in Google Scholar

33. Panizza, U., Strurzenegger, F., &Zettelmeyer, J. (2009). The economic and law of sovereign debt and default. Journal of Economic Literature, 3(3), 651-698.10.1257/jel.47.3.651Search in Google Scholar

34. Polito, V. and Wickens, M. (2014). Modelling the U.S. sovereign credit rating. Journal of Banking and Finance, 46, pp. 202-218.10.1016/j.jbankfin.2014.05.008Search in Google Scholar

35. Ramlall, I. (2015). Global Central Bank Ratings: A New Methodology for Global Excellence. Palgrave Macmillan.Search in Google Scholar

36. Rowland, P. and J.L. Torres (2004). Determinants of spread and creditworthiness for emerging market sovereign debt: A panel data study, Banco de la Republica de Colombia, 296.10.32468/be.295Search in Google Scholar

37. Sy, A. (2002). Emerging Market Bond Spreads and Sovereign Credit Ratings: Reconciling Market Views with Economic Fundamentals. Emerging Markets Review, 3, pp, 380-408.10.1016/S1566-0141(02)00043-2Search in Google Scholar

Recommended articles from Trend MD

Plan your remote conference with Sciendo