Country Risk Ratings and Financial Crises 1995--2001: A Survival Analysis

By Roa, Monica; Garcia, Andres Felipe et al. | Review of Business, Fall 2009 | Go to article overview

Country Risk Ratings and Financial Crises 1995--2001: A Survival Analysis


Roa, Monica, Garcia, Andres Felipe, Bonilla, Leonardo, Review of Business


Executive Summary

The health of the financial system is a sign of economic growth and a key indicator for investors. As a consequence, one of the main purposes for policymakers is to guarantee its stability and to shield it from foreign disturbances. Both financial and economic activities are susceptible to crises. As soon as a financial crisis happens, a country may face a default risk, which can be measured in the long term through the country's debt risk rating. Even though, with the recent crisis, the ability of ratings to predict a weak debtor has been questioned, in this paper we propose that the survival analysis methodology should be used to analyze falling rating duration. It has usually has been used in labor economics and with few exceptions in financial economics. Additionally we test the capability of macroeconomic variables to predict that event in 78 countries between 1995 and 2001. From the analysis, important differences between developed and emerging economies are indicated in exchange rate risk and economic indebtedness.

Introduction

As globalization grows, financial system stability is a key signal to investors and a bad behavior of the system will not contribute to economic growth. An indicator of the domestic capital market's health is the credit rating given to the Long Term Debt, which gives information of short term macroeconomic stability and long term payment capability.

This paper presents an effort to analyze financial crises through sovereign risk ratings. Our analysis presents two important aspects of downgrading which have not been considered before; they are the timing of the crisis and the impact of neighboring countries in crisis. In order to approach these points, we propose the use of a survival model to compute the risk function of a downgrading, controlling by macroeconomics and exchange monthly variables which reflect the economy's health at a short and mid term. We exclude from the analysis real sector variables, as they may be endogenous to the country's risk rating.

This methodology also allows forecasting crisis length and contagion by geographic and economic regions. We use a semi parametric methodology, which is better suited to the analysis of non-monotonic risk functions, given the persistence and the contagion effects.

Related Literature

As financial crisis are not new, we present literature that follows these events chronologically, as well as key indicators. The First Generation Models explain crises in the early 1980s, which were characterized by the macroeconomic imbalances. Krugman (1979, p. 318) uses a simple model to show how attempts to defend a fixed exchange rate can collapse in the face of a speculative attack. He shows how the persistent balance of payments' deficits (1) can create a run on the authorities' stock of international reserves and destroy the country's capacity to defend its exchange rate by limiting its ability to intervene in the foreign-exchange market. The central purpose of the models of this generation is to demonstrate how an attack and collapse of the exchange rate can occur before reserves have gotten exhausted and can also speed up the timing of the crisis. The end result is that the government uses up its reserves and cannot replenish them by borrowing abroad. The leading indicators of this generation are budget deficits, excessive rates of growth of money supply, dwindling reserves, excessive inflation, real exchange rate overvaluation and high interest rates.

With the crisis of early 1990s, the theory above was questioned, since not all the countries that succumbed displayed large fiscal and current account deficits. It is even more questionable considering that capital controls were lifted and international markets got wider and perhaps deeper. Obstfeld (1997, p. 68) and Ozkan and Sutherland (1998, p. 345) added the assumption that governments tend to balance the costs and benefits of defending the currency, through tight monetary policies and high interest rates.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Country Risk Ratings and Financial Crises 1995--2001: A Survival Analysis
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.