Courage to Capital? A Model of the Effects of Rating Agencies on Sovereign Debt Role-over

No 1506, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: We propose a model of rating agencies that is an application of global game theory in which heterogeneous investors act strategically. The model allows us to explore the impact of the introduction of a rating agency on financial markets. Our model suggests that the addition of the rating agency affects the probability of default and the magnitude of the response of capital flows to changes in fundamentals in a non–trivial way, and that introducing a rating agency can bring multiple equilibria to a market that otherwise would have the unique equilibrium.

Keywords: Credit rating; Rating agency; Sovereign debt; Global game (search for similar items in EconPapers)
JEL-codes: F34 G14 G15 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2005-04
New Economics Papers: this item is included in nep-fin
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Working Paper: Courage to Capital? A Model of the Effects of Rating Agencies on Sovereign Debt Roll–over (2005)
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