Risk and return—Is there an unholy cycle of ratings and yields?

Makram El-Shagi and Gregor von Schweinitz

Economics Letters, 2015, vol. 129, issue C, 49-51

Abstract: After every major financial crisis, the question about the responsibility of the rating agencies resurfaces. Regarding government bonds, the most frequently voiced concern targeted “unreasonably” bad ratings that might trigger capital flights and increasing risk premia which sanction further rating downgrades. In this paper we develop a multivariate, nonparametric version of the Pesaran type cointegration model that allows for nonlinearities, to show that a unique equilibrium between ratings and sovereign yields exists. Therefore, we have to reject the concern that there is an unholy cycle leading to certain default in the long run.

Keywords: Government debt; Ratings; Cointegration (search for similar items in EconPapers)
JEL-codes: C14 C25 F34 G24 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:129:y:2015:i:c:p:49-51

DOI: 10.1016/j.econlet.2015.02.007

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