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On the duration of sovereign ratings cycle phases

Agnello, Luca, Castro, Vítor and Sousa, Ricardo M. (2019) On the duration of sovereign ratings cycle phases. Journal of Economic Behavior and Organization. ISSN 0167-2681

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Identification Number: 10.1016/j.jebo.2019.01.016

Abstract

Using long-term sovereign ratings data for a panel of 130 countries over the last three decades, we investigate the duration and determinants of sovereign rating phases through the lens of discrete-time Weibull models. We find that the likelihood of the end of the 'speculative-grade’ phase increases as time goes by (i.e. there is positive duration dependence), but the ‘investment-grade’ phase is not duration dependent. Thus, for sovereigns rated as speculative, the build-up of reputation as good borrowers is a gradual process, whereas the reputation of investment-grade sovereigns solidifies and remains unchanged as time passes. However, the length of both phases significantly depends on the country's economic conditions. In particular, lower inflation, stronger growth and sounder fiscal policies shorten (prolong) the speculative- (investment-) grade phase. In addition, better governance quality helps to reduce the duration of speculative-grade phases.

Item Type: Article
Additional Information: © 2019 Elsevier B.V.
Divisions: Economics
Subjects: H Social Sciences > HG Finance
Q Science > QA Mathematics
JEL classification: G - Financial Economics > G1 - General Financial Markets > G10 - General
G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets
G - Financial Economics > G2 - Financial Institutions and Services > G24 - Investment Banking; Venture Capital; Brokerage; Rating Agencies
C - Mathematical and Quantitative Methods > C2 - Econometric Methods: Single Equation Models; Single Variables > C23 - Models with Panel Data
C - Mathematical and Quantitative Methods > C2 - Econometric Methods: Single Equation Models; Single Variables > C25 - Discrete Regression and Qualitative Choice Models
Date Deposited: 28 Mar 2019 00:13
Last Modified: 11 Nov 2019 00:15
URI: http://eprints.lse.ac.uk/id/eprint/100353

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