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Subjectivity in sovereign credit ratings

Lieven De Moor, Prabesh Luitel (), Piet Sercu and Rosanne Vanpée

Journal of Banking & Finance, 2018, vol. 88, issue C, 366-392

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.

Keywords: Credit ratings; Rating agencies; Artificial intelligence (search for similar items in EconPapers)
JEL-codes: G24 G15 O16 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1016/j.jbankfin.2017.12.014

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Handle: RePEc:eee:jbfina:v:88:y:2018:i:c:p:366-392