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Risk, ambiguity, and sovereign rating

Paolo Di Caro ()

International Economics and Economic Policy, 2015, vol. 12, issue 1, 57 pages

Abstract: Decisions of investing in sovereign assets involve both risk and ambiguity. Ambiguity arises from unknown elements characterizing the value of a generic sovereign. In presence of ambiguity, ambiguity-averse investors are prone to pay for obtaining summary information such as ratings which reduces ambiguity. Ambiguity-neutral and ambiguity-averse investors, then, make decisions on the basis of different informative sources. By presenting a simple model of sovereign rating under ambiguity, three facts occurring in today’s financial markets are explained. Sovereign ratings influence decisions of investment of ambiguity-sensitive individuals. Rating-dependent regulations create distortions in financial markets by institutionalising specific summary signals. Providing ratings may be a profitable activity. Some final suggestions propose future areas of theoretical and empirical research. Copyright Springer-Verlag Berlin Heidelberg 2015

Keywords: Risk; Ambiguity; Ambiguity aversion; Sovereign rating; Value of information; D80; D81; G11; G14 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1007/s10368-014-0279-6

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