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Publication

Subjectivity in sovereign credit ratings

Journal Contribution - Journal Article

© 2018 Elsevier B.V. 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.
Journal: Journal of Banking & Finance
ISSN: 0378-4266
Volume: 88
Pages: 366 - 392
Publication year:2018