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Including A Symposium on 50 Years of the Union for Radical Political Economics
Type: Book
ISBN: 978-1-78769-849-9

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Article
Publication date: 18 May 2015

Finn Marten Körner and Hans-Michael Trautwein

The purpose of this paper is to test the hypothesis that major credit rating agencies (CRAs) have been inconsistent in assessing the implications of monetary union…

Abstract

Purpose

The purpose of this paper is to test the hypothesis that major credit rating agencies (CRAs) have been inconsistent in assessing the implications of monetary union membership for sovereign risks. It is frequently argued that CRAs have acted procyclically in their rating of sovereign debt in the European Monetary Union (EMU), underestimating sovereign risk in the early years and over-rating the lack of national monetary sovereignty since the onset of the Eurozone debt crisis. Yet, there is little direct evidence for this so far. While CRAs are quite explicit about their risk assessments concerning public debt that is denominated in foreign currency, the same cannot be said about their treatment of sovereign debt issued in the currency of a monetary union.

Design/methodology/approach

While CRAs are quite explicit about their risk assessments concerning public debt that is denominated in foreign currency, the same cannot be said about their treatment of sovereign debt issued in the currency of a monetary union. This paper examines the major CRAs’ methodologies for rating sovereign debt and test their sovereign credit ratings for a monetary union bonus in good times and a malus, akin to the “original sin” problem of emerging market countries, in bad times.

Findings

Using a newly compiled dataset of quarterly sovereign bond ratings from 1990 until 2012, the panel regression estimation results find strong evidence that EMU countries received a rating bonus on euro-denominated debt before the European debt crisis and a large penalty after 2010.

Practical implications

The crisis has brought to light that EMU countries’ euro-denominated debt may not be considered as local currency debt from a rating perspective after all.

Originality/value

In addition to quantifying the local currency bonus and malus, this paper shows the fundamental problem of rating sovereign debt of monetary union members and provide approaches to estimating it over time.

Details

The Journal of Risk Finance, vol. 16 no. 3
Type: Research Article
ISSN: 1526-5943

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Book part
Publication date: 7 May 2019

Abstract

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Including A Symposium on 50 Years of the Union for Radical Political Economics
Type: Book
ISBN: 978-1-78769-849-9

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Article
Publication date: 18 May 2015

Bonnie G Buchanan

Abstract

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The Journal of Risk Finance, vol. 16 no. 3
Type: Research Article
ISSN: 1526-5943

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Book part
Publication date: 10 July 2020

Alexandre F. S. Andrada and Mauro Boianovsky

This chapter investigates the political and economic contexts of the controversy about the causes of the increase of income concentration in Brazil during the 1960s. That…

Abstract

This chapter investigates the political and economic contexts of the controversy about the causes of the increase of income concentration in Brazil during the 1960s. That was the most important economic debate that took place under the military dictatorship that ran the country from 1964 to 1985. The perceived sharp increase in income inequality posed a challenge to the economic legitimation of the military regime, which had by the early 1970s achieved high rates of economic growth. This chapter discusses the apparent paradox of relatively open economic debate during a period of political repression, as well as its international dimension as reflected in the role played by institutions such as the World Bank.

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Research in the History of Economic Thought and Methodology: Including a Symposium on Economists and Authoritarian Regimes in the 20th Century
Type: Book
ISBN: 978-1-83867-703-9

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Further Documents from the History of Economic Thought
Type: Book
ISBN: 978-1-84950-493-5

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Article
Publication date: 21 August 2017

Haoshen Hu

This paper aims to investigate the impact of sovereign rating signals on domestic banks’ stock returns in a European context.

Abstract

Purpose

This paper aims to investigate the impact of sovereign rating signals on domestic banks’ stock returns in a European context.

Design/methodology/approach

The author uses an event study technique to measure short-term bank stock abnormal returns that result from domestic positive or negative sovereign rating events. Then, test results from the univariate event studies are further scrutinised with the bank- and sovereign-related factors related to cross-sectional variations in abnormal bank returns.

Findings

The univariate results show that positive sovereign rating events do not lead to significant bank stock price reactions, while negative events are associated with negative share price effects on domestic banks. The multivariate regression results for the subsample of negative rating events show that the degrees of contagion effects depend on which credit rating agency issues the signal, on whether the events are preceded by other negative sovereign rating signals, and in some cases on the sovereign’s initial rating level and on the bank’s liquidity ratio, profitability level and size.

Originality/value

The study improves the test procedures used by Caselli et al. (2016) and sheds light on the bank valuation effect induced by massive negative sovereign rating signals during the crisis period. The results highlight the share price effect of sovereign events and address political implications of introducing risk weights for sovereign debts.

Details

The Journal of Risk Finance, vol. 18 no. 4
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 18 May 2015

William Patrick Forbes, Sheila O Donohoe and Jörg Prokop

The purpose of this cross-national study is to evaluate the communality and differences in experiences and policy responses in the run up to the 2007-2009 credit crisis…

Abstract

Purpose

The purpose of this cross-national study is to evaluate the communality and differences in experiences and policy responses in the run up to the 2007-2009 credit crisis and during its critical early stages in Germany, Ireland and the UK. The importance of shared cognitive illusions regarding the power and stability of financial markets is emphasised.

Design/methodology/approach

A multiple case study approach is used which draws on publicly available information to trace developments leading up to bank failures (or near failures) and the evolution of government responses drawing upon alternative paradigms used to justify State intervention.

Findings

Findings emphasise the role of state regulatory bodies and their response to the crisis as a primary source of the “rules of the game” in financial markets, here it is the “game of bank bargains” and a potential source of repair. Given the degree of interconnectedness, opacity and complexity of financial markets investors/politicians/regulators will fall victim to cognitive biases which affect their decisions.

Research limitations/implications

This case study method allows identification of patterns in decision-makers’ behaviour and yields richer insights than a quantitative approach but is limited in its generalisability.

Practical implications

This paper offers practical implications in suggesting that a pivotal step in effective crisis management requires directly addressing sources of uncertainty, namely, time pressure, complexity and opacity of underlying cause–effect relationships, empowering decision-makers to act responsibly.

Originality/value

This paper is novel in its illustration of the collective cognitive paradigm for justifying regulatory action across three countries using six case studies.

Details

The Journal of Risk Finance, vol. 16 no. 3
Type: Research Article
ISSN: 1526-5943

Keywords

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