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Determinants and Impact of Sovereign Credit Ratings

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The wealth of data now available allows us to estimatewhich quantitative indicators are weighed mostheavily in the determination of ratings, to evaluate the predictivepower of ratings in explaining a cross-section ofsovereign bond yields, and to measure whether ratingannouncements directly affect market yields on the day ofthe announcement.Our investigation suggests that, to a large extent,Moody’s and Standard and Poor’s rating assignments can beexplained by a small number of well-defined criteria,which the two agencies appear to weigh similarly. We alsofind that the market—as gauged by sovereign debtyields—broadly shares the relative rankings of sovereigncredit risks made by the two rating agencies. In addition,credit...
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Determinants and Impact of Sovereign Credit Ratings

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