A Market-based Indicator of Currency Risk: Evidence from American Depositary Receipts
IWH Discussion Papers,
We introduce a novel currency risk measure based on American Depositary Receipts(ADRs). Using a multifactor pricing model, we exploit ADR investors’ exposure to potential devaluation losses to derive an indicator of currency risk. Using weekly data for a sample of 831 ADRs located in 23 emerging markets over the 1994-2014 period, we find that a deterioration in the fiscal and current account balance, as well as higher inflation, increases currency risk. Interaction models reveal that these macroeconomic fundamentals drive currency risk, particularly in countries with managed exchange rates, low levels of foreign exchange reserves and a poor sovereign credit rating.
Determinants of the Size of the Sovereign Credit Default Swap Market
Journal of Fixed Income,
We analyze the sovereign credit default swap (CDS) market for 57 countries, using a novel dataset comprising weekly positions and turnover data. We document that CDS markets—measured relative to a country’s debt—are larger for smaller countries, countries with a rating just above the investment-grade cutoff, and countries with weaker creditor rights. Analyzing changes in credit risk, we find that rating changes matter but only for negative rating events (downgrades and negative outlooks). In particular, weeks with downgrades and negative outlooks are associated with a significantly higher turnover in the sovereign CDS market, even after controlling for changes in sovereign CDS spreads. We conclude that agencies’ ratings are a major determinant of the size of the sovereign CDS market.
01.07.2015 • 25/2015
Ratingagenturen – Abwärtsspirale durch Herabstufungen unwahrscheinlich
Wissenschaftler des Leibniz-Instituts für Wirtschaftsforschung Halle (IWH) haben die Wechselwirkungen von Länderratings und Zinsen auf Staatsanleihen untersucht und dabei keinerlei empirische Belege für eine Abwärtsspirale gefunden. Vielmehr stellten sie eine langsame Annäherung an ein langfristiges Gleichgewicht aus guten Ratings und niedrigen Zinsen fest. Eine negative Entwicklung wie zum Beispiel die Griechenlands in den Jahren 2010 und 2011 lässt sich nicht aus der Dynamik von Ratings und Zinsen erklären.
Negative Bonitätsbewertungen und Zinsen auf Staatsanleihen – Gibt es einen Teufelskreis?
Wirtschaft im Wandel,
Kann es nach einer Herabstufung der Bonität eines Staates zu einer Dynamik von steigenden Zinsen auf Staatsanleihen und weiter fallenden Ratings kommen, die unausweichlich in einem Staatsbankrott endet? Die hohe Persistenz von Ratings sowie die Beobachtung, dass Zinsen häufig negativ auf eine Herabstufung reagieren, legen die Möglichkeit einer solchen Abwärtsspirale nahe. Empirisch ist diese Dynamik allerdings nicht zu sehen. In den Daten ist im Gegenteil ausschließlich eine sehr langsame Annäherung an ein langfristiges Gleichgewicht von guten Ratings und niedrigen Zinsen zu beobachten. Gleichzeitig ist die Persistenz von Ratings allerdings hoch genug, um nach einer Herabstufung auf ein hochspekulatives Niveau (Rating von B oder schlechter) massive und langandauernde Zinsaufschläge zu erzeugen. Da eine solche Herabstufung in der Realität allerdings äußerst selten erfolgt, ist die Existenz des oben beschriebenen Teufelskreises zu verneinen. Eine negative Entwicklung wie zum Beispiel in Griechenland in den Jahren 2010 und 2011 lässt sich nicht als Ergebnis der Wechselwirkung von Ratings und Zinsen erklären.
Sovereign Credit Risk, Banks' Government Support, and Bank Stock Returns around the World: Discussion of Correa, Lee, Sapriza, and Suarez
Journal of Money, Credit and Banking,
In the years leading up to the 2008–09 financial crisis, many banks around the world greatly expanded their balance sheets to take advantage of cheap and abundantly available funding. Access to international funding markets, in particular, made it possible for banks to reach a size that in some cases was a large multiple of their home countries’ gross domestic product (GDP). In Iceland, for example, assets of the banking system reached up to 900% of GDP in 2007. Similarly, by the end of 2008, assets in UK and Swiss banks exceeded 500% of their countries’ GDPs, respectively. Banks may also have grown rapidly because they may have wanted to reach too-big-to-fail status in their country, implying even lower funding cost (Penas and Unal 2004).
The depth and severity of the 2008–09 financial crisis and the subsequent debt crisis in Europe, however, have cast doubts on the ability of governments to bail out banks when they experience severe difficulties, in particular, in financially fragile environments and faced with large budget imbalances. This has resulted in as what some observers have dubbed a “doom loop”: the combination of weak public finances and weak banks results in a vicious cycle, in which the funding cost of banks increases, as the ability of governments to bail out banks is called into question, in turn increasing the funding cost of these banks and making the likelihood that the government will actually have to step in even higher, which in turn increases funding cost to the government and so forth.
Against this background, the paper by Correa et al. (2014) explores the link between sovereign rating changes and bank stock returns. They show large negative reactions of stock returns in response to sovereign ratings downgrades for banks that are expected to receive government support in case of failure. They find the strongest effects in developed economies, where the credibility of government bail outs is higher ex ante, while the effects are smaller in developing and emerging economies. In my view, the paper makes a number of important contributions to the extant literature.
The Ex Ante versus Ex Post Effect of Public Guarantees
D. Evanoff, C. Holthausen, G. Kaufman and M. Kremer (eds), The Role of Central Banks in Financial Stability: How has it Changed? World Scientific Studies in International Economics 30,
In October 2006, Dominion Bond Rating Service (DBRS) introduced new ratings for banks that account for the potential of government support. The rating changes are not a reflection of any changes in the respective banks’ credit fundamentals. We use this natural experiment to evaluate the consequences of bail out expectations for bank behavior using a difference in differences approach. The results suggest a striking difference between the effects of bail out probabilities during calm times (“ex ante”) versus during crisis times (“ex post”). During calm times, higher bail-out probabilities result in higher risk taking, consistent with the moral hazard view and much of the empirical literature. However, in crisis times, we find that banks with higher bail out probabilities tend to increase their risk taking less compared to banks that were ex ante unlikely to be bailed-out. Charter values are one part of the explanation: Supported banks may have a funding advantage relative to non-supported banks during the crisis. However, we cannot rule out that other factors also may be playing a role, including tighter supervision of supported banks in crisis times.
Modelling Country Default Risk as a Latent Variable: A Multiple Indicators Multiple Causes Approach
We study the determinants of country default risk by applying a Multiple Indicators Multiple Causes (MIMIC) model. This accounts for the fact that country default risk is an unobservable variable. Whereas existing (regression-based) approaches typically use only one of several possible country default risk indicators as the dependent variable, the MIMIC model enables us to consider several indicators at once. The simultaneous consideration of sovereign yield spreads and Standard and Poor (S&P) ratings may help to improve the identification of the latent country default risk. Our results confirm most of the literature's main findings regarding important determinants of country default risk, refute others and provide new evidence to controversial questions.
The Importance of Estimation Uncertainty in a Multi-Rating Class Loan Portfolio
IWH Discussion Papers,
This article seeks to make an assessment of estimation uncertainty in a multi-rating class loan portfolio. Relationships are established between estimation uncertainty and parameters such as probability of default, intra- and inter-rating class correlation, degree of inhomogeneity, number of rating classes used, number of debtors and number of historical periods used for parameter estimations. In addition, by using an exemplary portfolio based on Moody’s ratings, it becomes clear that estimation uncertainty does indeed have an effect on interest rates.