Quo Vadis, Raters? A frontier approach to identify overratings and underratings in sovereign credit risk

�zt�rk, H�seyin; Tortosa-Ausina, Emili; Duygun, Meryem; Shaban, Mohamed

Abstract

This study analyses overratings and underratings in sovereign credit risk. The analysis uses partial frontier methods, a technique rarely applied in this literature. By combining a robust variant of the free disposal hull (FDH) estimator, we measure both underratings and overratings for individual countries and groups of countries. Particular attention is paid to comparing pre-crisis and crisis years in order to assess possible changes in the magnitude of the deviations. Our findings indicate a remarkable degree of both overratings and underratings during the analysed period (1999-2010), which 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 emphasize the importance of monitoring these deviations for sustainable financial stability. Our results also show the potential benefits of using partial frontier methods for measuring both underratings and overratings.

Citation

Öztürk, H., Tortosa-Ausina, E., Duygun, M., & Shaban, M. (2020). Quo Vadis, Raters? A frontier approach to identify overratings and underratings in sovereign credit risk. European Journal of Finance,

• Journal Article Type: Article
• Acceptance Date: Feb 24, 2020
• Online Publication Date: Apr 3, 2020
• Publication Date: Apr 3, 2020
• Deposit Date: Jul 31, 2020
• Publicly Available Date: Oct 4, 2021
• Print ISSN: 1351-847X
• Electronic ISSN: 1466-4364
• Publisher: Routledge
• Peer Reviewed: Peer Reviewed
• Keywords: credit rating agency; partial frontier; rating; sovereign credit risk JEL Classification Numbers: C51; E44; G15; G24 Communications to: Emili Tortosa-Ausina
• Public URL: https://nottingham-repository.worktribe.com/output/4090631
• Publisher URL: https://www.tandfonline.com/doi/abs/10.1080/1351847X.2020.1748678
• Additional Information: This is an Accepted Manuscript of an article published by Taylor & Francis in The European Journal of Finance on 03/04/2020, available online: http://www.tandfonline.com/10.1080/1351847X.2020.1748678