Quo Vadis, raters? A frontier approach to identify misratings in sovereign credit risk

Meryem Duygun (), Huseyin Ozturk, Mohamed Shaban () and Emili Tortosa-Ausina
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Meryem Duygun: School of Management, University of Leicester, UK
Mohamed Shaban: School of Management, University of Leicester, UK

No 2014/10, Working Papers from Economics Department, Universitat Jaume I, Castellón (Spain)

Abstract: This study attempts to provide one of the first comprehensive analyses on the misratings in sovereign credit ratings. The analyses are performed using partial frontier methods which should be considered innovative in this literature. By combining a robust variant of the Free Disposal Hull (FDH) estimator (order-m), we measure misratings (both under- and overratings) for both individual countries and groups of countries. Particular attention is put on the comparison between pre- and crisis years, in order to assess possible changes in the magnitude of the misratings. Our findings indicate that the degree of both overratings and underratings during the analysed period (1999-2010) is indeed remarkable. These misratings partially vanish during the last years of the sample (2008-2010), corresponding to the financial crisis, when many downgrades took place, especially in Eurozone countries. The results allow us to emphasise the importance of monitoring misratings for sustainable financial stability. These results also show the potential benefits of using partial frontier methods for measuring both under- and overratings.

Keywords: credit rating agency; partial frontier; rating; sovereign credit risk (search for similar items in EconPapers)
JEL-codes: C51 E44 G15 G24 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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