Risk, ambiguity, and sovereign rating
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. Copyright Springer-Verlag Berlin Heidelberg 2015
Year of publication: |
2015
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Authors: | Caro, Paolo |
Published in: |
International Economics and Economic Policy. - Springer. - Vol. 12.2015, 1, p. 41-57
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Publisher: |
Springer |
Subject: | Risk | Ambiguity | Ambiguity aversion | Sovereign rating | Value of information |
Saved in:
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