On the information content of sovereign credit rating reports : improving the predictability of rating transitions

Slapnik, Ursula (author), Lončarski, Igor (author)

In order to identify novel qualitative determinants of transitions in sovereign credit ratings, we construct six different textual sentiment and subjectivity measures using dictionary-based, and machine learning approaches on sovereign credit rating reports issued by Moody's and Fitch in the period from 2002 to 2017. After controlling for macroeconomic and fiscal strength, soft information, as well as known sources of proximity biases, we find that, on average, these novel text-based measures improve the classification accuracy of downgrades and upgrades. The improvement is more notable for sentiment than subjectivity measures, and for downgrades compared to upgrades. Next, we find evidence that credit rating agencies seem to follow the through-the-cycle rating philosophy by taking a longer horizon into account. Finally, to the best of our knowledge, we offer the most comprehensive analysis of textual sentiment measures and their effect on sovereign credit ratings thus far.

• Language: English
• Keywords: financial market, financial instruments, investments, price policy, models, sovereign credit rating reports, rating transitions, textual sentiment analysis, subjectivity, predictability, rating philosophy
• Work type: Article
• Typology: 1.01 - Original Scientific Article
• Organization: EF - School of Economics and Business
• Publication status: Published
• Publication version: Version of Record
• Year: 2021
• Number of pages: 19 str.
• Numbering: Vol. 73, art. 101344
• PID: 20.500.12556/RUL-127484
• UDC: 336
• ISSN on article: 1042-4431
• DOI: 10.1016/j.intfin.2021.101344
• COBISS.SI-ID: 60523267
• Publication date in RUL: 10.06.2021

Record is a part of a journal

• Title: Journal of international financial markets, institutions & money
• Publisher: Elsevier
• ISSN: 1042-4431
• COBISS.SI-ID: 2234908

Licences

• License: CC BY 4.0, Creative Commons Attribution 4.0 International
• Link: http://creativecommons.org/licenses/by/4.0/
• Description: This is the standard Creative Commons license that gives others maximum freedom to do what they want with the work as long as they credit the author.

Secondary language

• Language: Slovenian
• Keywords: finančni trg, finančni instrumenti, investicije, politika cen, modeli