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Determination of Sovereign Rating: Factor Based Ordered Probit Models for Panel Data Analysis Modelling Framework

Author

Listed:
  • Dilek Teker

    (Faculty of Economics and Administrative Sciences, Okan University, Turkey)

  • Aynur Pala

    (Research Analyst, Research Centre for Financial Risks,Okan University, Turkey.)

  • Oya Kent

    (Research Assistant, Research Centre for Financial Risks,Okan University, Turkey)

Abstract

The aim of this research is to compose a new rating methodology and provide credit notches to 23 countries which of 13 are developed and 10 are emerging. There are various literature that explains the determinants of credit ratings. Following the literature, we select 11 variables for our model which of 5 are eliminated by the factor analysis. We use specific dummies to investigate the structural breaks in time and cross section such as pre crises, post crises, BRIC membership, EU membership, OPEC membership, shipbuilder country and platinum reserved country. Then we run an ordered probit model and give credit notches to the countries. We use FITCH ratings as benchmark. Thus, at the end we compare the notches of FITCH with the ones we derive out of our estimated model.

Suggested Citation

  • Dilek Teker & Aynur Pala & Oya Kent, 2013. "Determination of Sovereign Rating: Factor Based Ordered Probit Models for Panel Data Analysis Modelling Framework," International Journal of Economics and Financial Issues, Econjournals, vol. 3(1), pages 122-132.
    • Handle: RePEc:eco:journ1:2013-01-12
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    References listed on IDEAS

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    2. Bissoondoyal-Bheenick, Emawtee & Brooks, Robert & Yip, Angela Y.N., 2006. "Determinants of sovereign ratings: A comparison of case-based reasoning and ordered probit approaches," Global Finance Journal, Elsevier, vol. 17(1), pages 136-154, September.
    3. Otaviano Canuto & Pablo F. Pereira Dos Santos & Paulo C. De Sá Porto, 2012. "Macroeconomics And Sovereign Risk Ratings," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 3(02), pages 1-25.
    4. Eliasson, Ann-Charlotte, 2002. "Sovereign credit ratings," Research Notes 02-1, Deutsche Bank Research.
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    7. Bissoondoyal-Bheenick, Emawtee, 2005. "An analysis of the determinants of sovereign ratings," Global Finance Journal, Elsevier, vol. 15(3), pages 251-280, February.
    8. Mr. Christian B. Mulder & Brieuc Monfort, 2000. "Using Credit Ratings for Capital Requirementson Lending to Emerging Market Economies: Possible Impact of a New Basel Accord," IMF Working Papers 2000/069, International Monetary Fund.
    9. António Afonso & Pedro Gomes & Philipp Rother, 2011. "Short‐ and long‐run determinants of sovereign debt credit ratings," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 16(1), pages 1-15, January.
    10. António Afonso & Pedro Gomes & Philipp Rother, 2006. "What “Hides” Behind Sovereign Debt Ratings?," Working Papers Department of Economics 2006/35, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    11. Hu, Yen-Ting & Kiesel, Rudiger & Perraudin, William, 2002. "The estimation of transition matrices for sovereign credit ratings," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1383-1406, July.
    12. Hammer, P.L. & Kogan, A. & Lejeune, M.A., 2006. "Modeling country risk ratings using partial orders," European Journal of Operational Research, Elsevier, vol. 175(2), pages 836-859, December.
    13. Antonio Afonso, 2003. "Understanding the determinants of sovereign debt ratings: Evidence for the two leading agencies," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 27(1), pages 56-74, March.
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    Cited by:

    1. Julian Vasilev, 2014. "Calculating the Probability of Returning a Loan with Binary Probability Models," Romanian Statistical Review, Romanian Statistical Review, vol. 62(4), pages 55-71, December.
    2. Annika Luisa Hofmann & Miguel Ferreira & João Lampreia, 2017. "Case Study: DBRS Sovereign Rating of Portugal. Analysis of Rating Methodology and Rating Decisions," GEE Papers 0073, Gabinete de Estratégia e Estudos, Ministério da Economia, revised Jul 2017.
    3. Abdulkerim Karaaslan & Kürşat Özgür Özden, 2017. "Forecasting Turkey’s Credit Ratings with Multivariate Grey Model and Grey Relational Analysis," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 15(3), pages 583-610, September.
    4. Alexander M. Karminsky & Ella Khromova, 2016. "Modelling banks’ credit ratings of international agencies," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 6(3), pages 341-363, December.
    5. Srđan Jelinek & Pavle Milošević & Aleksandar Rakićević & Ana Poledica & Bratislav Petrović, 2022. "A Novel IBA-DE Hybrid Approach for Modeling Sovereign Credit Ratings," Mathematics, MDPI, vol. 10(15), pages 1-21, July.
    6. LaGarda, Guillermo & Prat, Jordi & Solera, Marco & Beverinotti, Javier, 2016. "Debt and Credit Quality in Central America, Panama, and the Dominican Republic," MPRA Paper 74163, University Library of Munich, Germany.
    7. Zwart, Sanne, 2022. "How much is too much? Assessing the non-linear relationship between debt and sovereign creditworthiness," EIB Working Papers 2022/05, European Investment Bank (EIB).
    8. Mahmoud K. El-Jafari, 2013. "Palestinian Household Willingness and Ability to Pay for Public Utilities in The West Bank: The Case of Electricity and Water," Working Papers 784, Economic Research Forum, revised Oct 2013.
    9. Šergo Zdravko & Gržinić Jasmina, 2018. "Does the International Tourism Industry Relax Sovereign Credit Ratings: The Case of Countries Most Reliant on Tourism," South East European Journal of Economics and Business, Sciendo, vol. 13(2), pages 100-111, December.

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    More about this item

    Keywords

    Credit notches; factor analysis; ordered probit model;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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