Munich Personal RePEc Archive

Risk, ambiguity and sovereign rating

Di Caro, Paolo (2014): Risk, ambiguity and sovereign rating. Published in: International Economics and Economic Policy No. online first (6 June 2014)

[img]
Preview
PDF
MPRA_paper_60295.pdf

Download (592kB) | Preview

Abstract

Decisions of investing in sovereign assets involve both risk and ambiguity. Ambiguity arises from unknown elements characterizing the value of a generic sovereign. In presence of ambiguity, ambiguity-averse investors are prone to pay for obtaining summary information such as ratings which reduces ambiguity. Ambiguity-neutral and ambiguity-averse investors, then, make decisions on the basis of different informative sources. By presenting a simple model of sovereign rating under ambiguity, three facts occurring in today’s financial markets are explained. Sovereign ratings influence decisions of investment of ambiguity-sensitive individuals. Rating-dependent regulations create distortions in financial markets by institutionalising specific summary signals. Providing ratings may be a profitable activity. Some final suggestions propose future areas of theoretical and empirical research.

UB_LMU-Logo
MPRA is a RePEc service hosted by
the Munich University Library in Germany.