Emerging Countries Sovereign Rating Adjustment using Market Information: Impact on Financial Institutions Investment Decisions

Dominique Guegan (), Bertrand Hassani () and Xin Zhao ()
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Dominique Guegan: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique
Bertrand Hassani: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique
Xin Zhao: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique

Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) from HAL

Abstract: Assets, debts and other financial products issued by emerging countries are usually considered more speculative than those issued by developed economies. Therefore, relying on traditional rating agencies to invest in these countries is problematic as the information used to assess the economic and market condition in these economies is quickly outdated. Consequently, both the investment opportunities and the necessity to clear particular positions may be missed, respectively resulting in potential significant costs of opportunity or losses. Therefore, an approach taking into account the latest information displayed by financial markets may enable us bypassing the traditional limits. As a result, this chapter proposes a creditworthiness evaluation methodology based on adjusting ratings obtained from macroeconomic fundamentals (GDP growth rate, inflation, external debts, etc.) and financial market movements (bonds, equity volume, volatility, etc). In the first step, a general panel model is applied on country-specific information to generate fundamental ratings. In the second step, applying a multi-factor model to market indicators and breaking down long-term sovereign bond yields into different risk premia, market implied ratings are obtained. Finally, the rating to be considered (denoted "δ-Rating") for investment purposes is a combination of fundamental ratings and market implied ratings carrying out an adapted Bühlmann-Straub method (Credibility Theory). Then, emerging countries "δ-Rating" will be compared to those obtained from developed countries and discussed against financial institutions risk appetite.

Keywords: Credit risk; rating; Panel model; multi-factor regression; credibility theory; Risque de crédit; notes; modèle Panel; multi-facteur de régression; théorie de la crédibilité (search for similar items in EconPapers)
Date: 2013-03
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00820839
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Citations: View citations in EconPapers (11)

Published in 2013

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Working Paper: Emerging Countries Sovereign Rating Adjustment using Market Information: Impact on Financial Institution Investment Decisions (2013)
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