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On the duration of sovereign ratings cycle phases

Luca Agnello, Vitor Castro () and Ricardo Sousa ()

Journal of Economic Behavior & Organization, 2021, vol. 182, issue C, 512-526

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.

Keywords: Duration analysis; Duration dependence; Sovereign ratings; Investment-grade; Speculative-grade; Economic environment; Fiscal position; Quality of governance (search for similar items in EconPapers)
JEL-codes: C23 C25 G10 G15 G24 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.jebo.2019.01.016

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Journal of Economic Behavior & Organization is currently edited by Houser, D. and Puzzello, D.

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