Sovereign Risk Ratings: Biased Toward Developed Countries?

Abstract

Sovereign credit ratings are widely used measurements for "country risk" in international capital markets. However, they have been exposed to increasing criticism in the aftermath of the recent global financial crises. Many international authorities proposed new frameworks for the regulation and supervision of the credit rating sector, in which many countries have taken various steps in this respect. Yet the reliability of sovereign credit ratings has not been criticized in the literature. Using random effects ordered probit modeling, this study explores the reliability of credit ratings. Separate analyses of developed and developing countries suggest that the consistency of credit ratings differs by favoring the developed country group.