Courage to Capital? A Model of the Effects of Rating Agencies on Sovereign Debt Roll-Over

25 Pages Posted: 21 Apr 2005

See all articles by Mark A. Carlson

Mark A. Carlson

Board of Governors of the Federal Reserve System

Galina Hale

University of California, Santa Cruz

Date Written: April 2005

Abstract

We propose a model of rating agencies that is an application of global game theory in which heterogeneous investors act strategically. The model allows us to explore the impact of the introduction of a rating agency on financial markets. Our model suggests that the addition of the rating agency affects the probability of default and the magnitude of the response of capital flows to changes in fundamentals in a non-trivial way, and that introducing a rating agency can bring multiple equilibria to a market that otherwise would have the unique equilibrium.

Keywords: credit rating, rating agency, sovereign debt, global game

JEL Classification: F34, G14, G15

Suggested Citation

Carlson, Mark A. and Hale, Galina, Courage to Capital? A Model of the Effects of Rating Agencies on Sovereign Debt Roll-Over (April 2005). Available at SSRN: https://ssrn.com/abstract=708581

Mark A. Carlson

Board of Governors of the Federal Reserve System ( email )

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Galina Hale (Contact Author)

University of California, Santa Cruz ( email )

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Santa Cruz, CA 95064
United States