Determinants and informational value of sovereign credit ratings / Lim Kok Tiong

Lim , Kok Tiong (2021) Determinants and informational value of sovereign credit ratings / Lim Kok Tiong. PhD thesis, Universiti Malaya.

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Abstract

The sovereign credit ratings (SCRs) issued by Moody’s, S&P, and Fitch in the form of alpha-numeric (i.e., Aaa, Aa1, Aa2, Aa3, etc.) and alpha-symbol (i.e., AAA, AA+, AA, AA-, etc.) are essential for rated countries to gain access to funds without the conditionality on collateral placement or the commitment on austerity measures. The SCR notches which are proxies of creditworthiness ranking on rated countries have been an integral part and a key determinant of the cost of borrowing. However, the prolonged implementation of zero-bound-policy-rate (ZBPR) and quantitative easing programme (QEP) raises the query on SCRs relevancy. This thesis examines the determination of SCRs and SCRs information value on sovereign bond yields (SBYs) and sovereign credit default swap spreads (SCDSs) of investment-grade rated countries. A sample of 32 investment grade multi-rated countries with quarterly and annual observations spanning from 2008 to 2017, when ZBPR and QEP were in effect, are used in this study. The empirical results show no evidence that the determination of SCRs was compromised when ZBPR and QEP were in effect. The SCRs determinants consist of GDP Growth, GDP Per Capita, Government Effectiveness Index, Inflation, Fiscal Balance, Debt to GDP, Reserve to GDP, and Financial Development Index continue to predict SCRs with high accuracy. However, the empirical results show that the SCRs information value was indeed disregarded, and rendered irrelevant on debts price discovery. The empirical estimates show that SCRs, irrespective of the credit rating agencies, are insignificant in the pricing of SBYs since 2008. The empirical estimates show that SCRs are also insignificant in pricing the SCDSs, but only from 2012 onwards. Since the SCRs is an essential enabler on the transmission of funds among countries and private sectors, the results showing that SCRs information value was disregarded in SBYs and SCDSs pricing present broad and cascading implication on credit risk pricing. Therefore, the findings on SCRs information value being irrelevant when ZBPR and QEP were in effect provide an important revelation. This revelation must be assessed and mitigated by the credit rating agencies, policymakers, and institutional investors.

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