Courage to Capital? A Model of the Effects of Rating Agencies on Sovereign Debt Roll-over
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.
Carlson, Mark A. and Hale, Galina, "Courage to Capital? A Model of the Effects of Rating Agencies on Sovereign Debt Roll-over" (2005). Cowles Foundation Discussion Papers. 1788.