25 Years IWH

The Joint Dynamics of Sovereign Ratings and Government Bond Yields

Can a negative shock to sovereign ratings invoke a vicious cycle of increasing government bond yields and further downgrades, ultimately pushing a country toward default? The narratives of public and political discussions, as well as of some widely cited papers, suggest this possibility. In this paper, we will investigate the possible existence of such a vicious cycle. We find no evidence of a bad long-run equilibrium and cannot confirm a negative feedback loop leading into default as a transitory state for all but the very worst ratings.

01. July 2016

Authors Makram El-Shagi Gregor von Schweinitz

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