De Oliveira and Montes (2020)

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Sovereign credit news and Effects of

sovereign
disagreement in expectations credit news by
CRAs
about the exchange rate: evidence
from Brazil
Diego Silveira Pacheco de Oliveira and Gabriel Caldas Montes Received 24 October 2019
Revised 29 February 2020
Fluminense Federal University, Niteroi, Brazil 1 July 2020
Accepted 3 July 2020
Abstract
Purpose – Credit rating agencies (CRAs) are perceived as highly influential in the financial system since their
announcements can affect several players in the financial markets, from big private financial and non-financial
companies and their financial markets experts to sovereign states. In this sense, this study investigates
whether sovereign credit news issued by CRAs (measured by comprehensive credit rating (CCR) variables)
affect the uncertainties about the exchange rate in the future (captured by the disagreement about exchange
rate expectations). The study is relevant once there is evidence indicating that CRAs’ assessments are
responsible for affecting international capital flows and, thus, sovereign rating changes can affect the
expectations formation process regarding the exchange rate. In addition, there is evidence indicating that the
disagreement about exchange rate expectations affects the disagreement about inflation expectations, which
brings consequences to policymakers.
Design/methodology/approach – The dependent variables are the disagreement in expectations about the
Brazilian exchange rate for different forecast horizons, 12, 24 and 36 months ahead and the first principal
component of theses series. On the other hand, the CCR variables are built upon the long-term foreign-currency
Brazilian bonds ratings, outlooks and credit watches provided by the main CRAs. Estimates are obtained using
ordinary least squares (OLS) and generalized method of moments (GMM); a dynamic analysis is performed
using vector-autoregressive (VAR) through impulse-response functions.
Findings – Negative (positive) sovereign credit news, given by a rating downgrade (upgrade) and/or a
negative (positive) outlook/watch status, increase (decrease) the disagreement about exchange rate
expectations. This result holds for all disagreement and CCR variables.
Practical implications – The study brings practical implications to both private agents (mainly financial
market experts) and policymakers. An important practical implication of the study concerns the ability of
CRAs to affect the expectations formation process of financial market experts regarding the future behavior of
the exchange rate. When a CRA issues a signal of improvement in a country’s sovereign rating, this signal
reflects the perception of improvement in macroeconomic fundamentals and reduction of uncertainties about
the country’s ability to honor its financial obligations, which therefore, facilitates the expectations formation
process, causing a reduction in the disagreement about the exchange rate expectations. With respect to the
consequences for policymakers, they will have more difficulty in guiding expectations in a country with a
worse sovereign risk rating, where agents have difficulties in forming expectations and the disagreement in
expectations is greater.
Originality/value – The study is the first to analyze the impact of CRAs’ announcements on the disagreement
about exchange rate expectations. Moreover, it connects the literature that investigates the effects of sovereign
credit news on the economy with the literature that examines the main determinants of disagreement in
expectations about macroeconomic variables.
Keywords Sovereign credit rating, Disagreement in expectations, Exchange rate
Paper type Research paper
1. Introduction
Credit rating agencies (CRAs) are perceived as highly influential in the financial system since
their announcements can affect several players in the financial markets, from big private
financial and non-financial companies and their financial markets experts to sovereign
Journal of Economic Studies
© Emerald Publishing Limited
0144-3585
JEL Classification — E44, F34, F37, G24 DOI 10.1108/JES-10-2019-0483
JES states and their policymakers. CRAs play a crucial role in international financial markets by
providing credit information about sovereign bonds. As a consequence, CRAs’ assessments
are responsible for affecting international capital flows, especially in developing countries
(Reinhart, 2002; Kim and Wu, 2008), and, thus, sovereign rating changes can cause exchange
rate changes. For instance, some investors, such as pension funds from developed countries,
would sell the affected country’s sovereign bonds if the default probability from such
bonds increases, which would impact the exchange rate. Alsakka and Gwilym (2012) and
Baum et al. (2016) provide evidence that CRAs’ announcements can cause exchange rate
movements.
CRAs use a combination of quantitative and qualitative factors to assess a country’s
sovereign bond [1]. However, sovereign credit information is disclosed not only by rating
changes, but also by credit watch and outlook announcements. Whilst rating changes are
associated with permanent changes in issuer credit quality, outlook and credit watch reports
are supporting instruments that indicate possible rating adjustments in the future.
Kaminsky and Schmukler (2002) and Sy (2004), for example, found evidence that outlook
and credit watch status are at least as important as rating changes to affect markets.
Hence, based on all credit news issued by the CRAs it is possible to create a comprehensive
credit rating (CCR) variable, capable of representing CRAs’ perception of a country’s
sovereign risk.
Using sovereign credit ratings or a CCR variable, several studies have found that
CRAs’ opinions affect financial markets in different ways (e.g. Hand et al., 1992;
Kaminsky and Schmukler, 2002; Hull et al., 2004; Norden and Weber, 2004; Sy, 2004;
Gande and Parsley, 2005; Ferreira and Gama, 2007; Hill et al., 2010; Ismailescu and
Kazemi, 2010; Alsakka et al., 2014; Drago and Gallo, 2017; Caselli et al., 2016; Baum et al.,
2016; Eraslan, 2017). However, when we investigate the literature carefully, we find that
there are no studies that have analyzed the effect of sovereign credit ratings or a CCR
variable on disagreement in expectations. In particular, there are no studies that have
analyzed the effect of CRAs’ perception on the expectations formation process about the
exchange rate. Therefore, as a novelty, our study is the first to investigate whether CRAs’
perception [2] about Brazil’s sovereign risk [3] can affect exchange rate expectations in
this country.
For inflation targeting (IT) countries, such as Brazil, anchoring inflation expectations is
essential to reach the inflation target. However, disagreements in expectations about
inflation may occur (Mankiw et al., 2003; Oliveira and Curi, 2016; Montes et al., 2016a;
Montes and Ferreira, 2018), and this disagreement may arise from the lack of consensus in
the expectation formation process about the exchange rate. Montes and Ferreira (2018)
provide evidence that increases in disagreement about exchange rate expectations increase
disagreement about inflation expectations. Hence, knowing whether CRAs’ assessments
affect the disagreement about exchange rate expectations is particularly important to
policymakers from IT countries because this disagreement is able to affect inflation
expectations.
In this sense, the paper brings the following contributions to the literature. First, it
investigates whether CRAs’ announcements (captured by CCR variables) affect the
expectations formation process about exchange rate and, as a consequence, the
disagreement about exchange rate expectations. Our study differs from the works of
Alsakka and Gwilym (2012) and Baum et al. (2016), which analyze the effect of CRAs’
announcements on the exchange rate level and volatility. To our knowledge, no study has
addressed this issue. In practical terms, this is important because exchange rate
expectations affect inflation expectations as well as several financial variables. Since
expectations play a key role in decision making process, studies addressing the process of
expectations formation seek to understand the determinants and consequences of
disagreement in expectations (e.g. S€oderlind, 2011; Dovern et al., 2012; Oliveira and Effects of
Curi, 2016; Montes et al., 2016a; Rico et al., 2016). Mankiw et al. (2003) argue that agents sovereign
may present divergences in their expectations and, therefore, may disagree about the
future behavior of different economic variables. They also stress that the disagreement
credit news by
in expectations may be substantial and vary over time according to the evolution of CRAs
uncertainties surrounding the behavior of certain economic variables. Thus, in line with
this argument presented by Mankiw et al. (2003), as a novelty, we bring evidence about the
impact of CRAs’ announcements on the disagreement about exchange rate expectations.
Second, the paper provides estimates about the impact of CRAs’ perception about
Brazil’s sovereign risk on the disagreement measures of different forecasting horizons
(12, 24 and 36 months ahead). This is particularly important because several financial and
foreign trade transactions are based on foreign exchange contracts with different future
maturities. Lastly, based on a dynamic analysis, we also examine how long this effect
holds on each disagreement measure. This allows us to see how the disagreement measures
of distinct forecasting horizons, as well as its common trend, respond to CRAs’
announcements.
We build four CCR variables, which include sovereign rating, outlook and credit watch
changes. These variables provide us a broad perspective regarding CRAs’ country risk
perception. The findings suggest negative (positive) sovereign credit news, given by a rating
downgrade (upgrade) and/or a negative (positive) outlook/watch status, increase (decrease)
the disagreement in expectations about the exchange rate. The interpretation is
straightforward. The deterioration of sovereign risk perception increases capital outflow
and leads to devaluation of the domestic currency. These effects increase the uncertainty
regarding the future economic outcomes, which tend to enhance the dispersion and, therefore,
the disagreement in expectations about the exchange rate.
An important practical implication of the study concerns the ability of CRAs to affect
the expectations formation process of financial market experts regarding the future
behavior of the exchange rate. According to the findings of the paper, when a CRA issues
a signal of improvement in a country’s sovereign rating, this signal reflects the perception
of improvement in macroeconomic fundamentals and reduction of uncertainties about
the country’s ability to honor its financial obligations, which therefore, facilitates
the expectations formation process, causing a reduction in the disagreement about
the exchange rate expectations. Thus, CRAs’ assessments can affect economic sectors
that rely on the future value of the exchange rate to run their business through the
effects that their assessments have on the level of uncertainty about the exchange rate in
the future. The study also brings practical implications to policymakers, because, in
an environment with a worse sovereign risk rating, where agents have difficulties in
forming expectations, causing the disagreement about exchange rate expectations to be
greater, monetary policy, for example, will have more difficulty in guiding inflation
expectations.
Thus, the rationale for this analysis in terms of policy implications comes from
two particular literature studies: one related to the effects that CRAs’ assessments
about sovereign risk exert on financial markets and the other related to the influence that
both exchange rate and exchange rate expectations have on inflation and inflation
expectations (pass-through effect) and monetary policy interest rate (fear of floating).
According to Montes and Ferreira (2018), since the option of several countries for adopting
the floating exchange rate regime and the IT regime, the literature related to the exchange
rate pass-through and fear of floating has developed more vigorously. In brief, the
literature suggests the pass-through effect from exchange rate to inflation cannot be
neglected; under the IT regime, the fear of floating is clearly related to the fear of inflation,
and both can be justified by the fear of the monetary authority in relation to the pass-
JES through effect from exchange rate devaluation to domestic prices (Ball and Reyes,
2004 and 2008).
In this sense, Montes and Ferreira (2018) developed a study to investigate whether the
increase in uncertainty about the behavior of the exchange rate in the future is able to
increase uncertainties related to both inflation and monetary policy interest rate in the
future. Their findings indicate that the disagreement in expectations about exchange
rate impacts the disagreements in expectations about both inflation and monetary policy
interest rate.
Our study complements Montes and Ferreira (2018) and provides a broader perspective
on the consequences that sovereign risk assessments issued by CRAs have on the
expectations formation process for the exchange rate and, as a consequence, for inflation
and monetary policy. Hence, based on the findings of this study and on the findings of
Montes and Ferreira (2018), it is possible to argue that negative sovereign risk assessments
issued by CRAs may cause uncertainties about both inflation and the conduct of monetary
policy, once these assessments may create uncertainties about the future behavior of
the exchange rate and undermines one of the roles of the IT regime, which is to guide
expectations.
2. Data and methodology

Aiming at estimating the effect of CRAs’ perception about Brazil’s sovereign risk on the
disagreement about exchange rate expectations, our study relies on a time series sample from
December 2001 to March 2018 (monthly data). The sovereign ratings and the credit signal
data embedded in them were gathered from Bloomberg database. All the data for the
remaining variables, including the expectations series used to build the disagreement
variables, were gathered from the Central Bank of Brazil (CBB) database.
The measure of disagreement in expectations about exchange rate adopted in this study is
the difference between the highest value and the lowest value expected by the agents for the
exchange rate in a specific date in the future [4]. Based on this measure, we calculate the
disagreement in expectations about the Brazilian exchange rate for three different forecast
horizons, 12, 24 and 36 months ahead ðDisag Ex12 t ; Disag Ext and Disag Ext Þ, as well as
24 36
the first principal component of theses series ðDisag Ext Þ. These components are good
PC
proxies for their common trend, allowing us to make inference regarding the effect of
sovereign credit news on the exchange rate expectations. Moreover, the application of this
technique has a long tradition is the study of conventional yield curves (Litterman and
Scheinkmann, 1991). In addition, this technique also filters sudden shifts on a given measure
of disagreement (say, Disag Ex36 t , for instance), which do not echo upon other measures. This
sort of shift can be considered as outliers and, therefore, should be neglected. Figure 1a shows
the path of the Disag ExPC t from December 2001 to April 2018, whilst Figure 1b exhibits the
path of Disag Ex12 t , Disag Ex24 36
t and Disag Ext for the same period.
Our independent variables of interest are built upon the long-term foreign-currency
Brazilian bonds ratings, outlooks and credit watches provided by the main CRAs. The
ratings given by these CRAs are variations of the scale A, B and C. In addition, CRAs report
both short-term and long-term credit ratings and signals in the form of outlook and credit
watch reports for sovereigns in their foreign-currency debts. Given their qualitative nature,
sovereign ratings need to be transformed into a numerical value to enable a quantitative
analysis. Regarding both short-term and long-term credit ratings, we use two mapped
numerical rating scales. In the first one, which we called short scale, we assign numerical
values for each of the rating grade ranging from 1 for default (SD/RD/D) to 22 for the
AAA/Aaa. In the second one, which we called long scale, we assign numerical values for each
rating grade ranging from 1 for default or nearly default (equal or below CC/Ca) to 58 for
AAA/Aaa. The rating classification of the three main CRAs and the linear numerical scale are
8
Effects of
Disagreement principal component sovereign
6
credit news by
CRAs
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(a)
3.0
Disagreement 12 months
2.5
2.0
1.5
1.0
0.5
Figure 1.
Disagreement in
0.0 expectations about the
exchange rate
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(prepared by the
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authors)
(b)
presented in Table 1. The rating assigned for each month is the one observed at the end
of that month.
Regarding credit signals issued in the form of outlook and credit watch reports, these
signals indicate that a sovereign bond is on review or watch list for upgrade/downgrade prior
to the actual upgrade or downgrade actions. Hence, based on existing studies (e.g. Gande and
Parsley, 2005; Kim and Wu, 2008; Cai et al., 2018), we add these credit signals on the
transformed rating scale, i.e. for grades from each agency, an aggregate score denominated as
CCR is calculated by summing the rating score and the signals issued in the form of outlook
and credit watch for foreign-currency debts. The average rating score is the average of the
aggregate scores from all three rating agencies. Table 2 describes the credit signals and the
numerical value assigned for each of these signals, which are then added to both numerical
rating scales [5]. After we apply this CCR scale that incorporates ratings, outlook and watch
status for each of the main CRAs, we take the arithmetical average of them. Doing so, we
JES Numerical
scale Credit rating agencies
Short Long Rating classification S&P Moody’s Fitch
22 58 Investment Extremely strong capacity to meet financial AAA Aaa AAA

21 55 grade commitments AAþ Aal AAþ
20 52 Very strong capacity to meet financial AA Aa2 AA
19 49 commitments AA– Aa3 AA–
18 46 Very strong capacity to meet financial Aþ A1 Aþ
17 43 commitments but somewhat susceptible to A A2 A
16 40 adverse economic conditions and changes in A– A3 A–
circumstances
15 37 Adequate capacity to meet financial BBBþ Baa1 BBBþ
14 34 commitments but more subject to adverse BBB BBB2 BBB
13 31 economic conditions BBB– Baa3 BBB–
12 28 Speculative Less vulnerable in the near-term but faces BBþ Ba1 BBþ
11 25 grade major ongoing uncertainties to adverse BB Ba2 BB
10 22 business, financial and economic conditions BB– Ba3 BB–
9 19 More vulnerable to adverse business, Bþ B1 Bþ
8 16 financial and economic conditions but B B2 B
7 13 currently has the capacity to meet financial B– B3 B–
conditions
6 10 Currently vulnerable and dependent on CCCþ Caa1 CCCþ
5 7 favorable business, financial and economic CCC Caa2 CCC
4 4 conditions to meet financial commitments CCC – Caa3 CCC–
3 1 Highly vulnerable; default has not yet CC Ca CC
2 occurred but is expected to be a virtual C C C
Table 1.
CRAs sovereign credit certainty
ratings system, rating 1 Payment default on a financial commitment SD RD
classification and or breach of an imputed promise D
numerical scale Note(s): Table prepared by the authors
guarantee to have a variable which represents a broad notion of sovereign risk perception of
Brazilian bonds. The CCR variables that we built have regular frequency on a monthly
periodicity.
In order to illustrate the result of one of our numerical transformations, Figure 2 shows the
evolution of Brazil’s average sovereign rating plus the credit signals of the main CRAs after
the long scale transformation [6]. As can be seen, the sovereign credit news associated with
Brazilian’s bonds varied a lot in the last two decades. It worsened at the beginning of our
sample period and then improved for ten years straight, from March 2003 to May 2013. This
period of decreased in sovereign risk perception warranted the investment grade to Brazilian
bonds. However, since 2013 this perception worsened again, which put Brazilian bonds back
again as speculative grade from September 2015 onwards.
Following Sy (2004) and Alsakka and Gwilym (2012), we use a logit-type transformation of
the ratings plus the credit signals (called LCCR) to address the possible existence of non-
linearity in the rating scales:
LCCR:Lt ¼ ln½CCR:Lt =ð59 CCR:Lt Þ or LCCR:St ¼ ln½CCR:St =ð23 CCR:St Þ (1)
where, CCR:it indicates the linear transformation of the short (S) or long (L) scale; and
t ¼ 1; 2; 3; . . . ; 196 denotes the period. We employ Eqn (1) to each CRA separately and then
we take the arithmetical average of them. As before, this variable also represents a broad
perspective regarding Brazil’s sovereign risk, but now considering the possible non-
linearities in the rating scales.
Rating
Effects of
transformation sovereign
Credit signals Short Long Credit signal description credit news by
Positive credit watch þ0.25 þ2 High likelihood of an upgrade in the short-term (up to 6 months) CRAs
Positive outlook þ0.25 þ1 High likelihood of an upgrade in the medium or long-term (from
6 months to 2 years)
Stable credit watch 0 0 Neither an upgrade or a downgrade is expected in the short-
term (up to 6 months) Neither an upgrade or a downgrade is
Stable outlook 0 0 expected in the medium or long-term (from 6 months to 2 years)
Negative outlook 0.25 1 High likelihood of a downgrade in the medium or long-term
(from 6 months to 2 years) Table 2.
Negative credit watch 0.25 2 High likelihood of a downgrade in the short- term (up to Credit signals and their
6 months) numerical
Note(s): Table prepared by the authors transformation
36
Long linear average rating
32
Investment grade
28
24
20 Figure 2.
Evolution of Brazil’s
sovereign risk
16 perception (prepared
by the authors)
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Regarding the control variables, they were chosen based on the literature that investigates
the determinants of the disagreement in expectations (e.g. Mankiw et al., 2003; Oliveira and
Curi, 2016; Montes and Ferreira, 2018) and on the literature that assesses the effects of
macroeconomic and fiscal variables on the exchange rate (e.g. Hakkio, 1996; Stoker, 1999).
Thus, the estimates include the following control variables: exchange rate volatility
(Vol_ex_rate), output gap (Gap), gross public debt as a proportion of GDP (Debt), budget
balance as a proportion of GDP (Budget), monetary policy interest rate (Interest_rate), US
monetary policy interest rate (Fed_funds_rate), inflation rate (Inflation), international
reserves (Reserves), dummy variable for the Global Financial Crisis (Subprime), dummy
variable for the “Lula effect” (Lula), dummy variable for the Brazilian political crisis
(Pol_crisis) and global risk aversion (Vix) [7].
Table 3 shows the correlations between the disagreement measures and the CCR
variables, as well as the correlations between the disagreement measures and the control
variables. In relation to the variables of interest (CCR), we present the correlations for
the variables in level as well as for their variations (variables in first difference). The
correlations between all the disagreement measures and all rating variables are negative.
Hence, bad (good) sovereign credit news, given by a rating downgrade (upgrade) or a
JES Disag_Expc Disag_Ex12 Disag_Ex24 Disag_Ex36
CCR.L 0.40 0.39 0.41 0.36

CCR.S 0.39 0.37 0.40 0.35
LCCR.L 0.40 0.39 0.42 0.36
LCCR.S 0.39 0.37 0.40 0.35
ΔCCR.L 0.34 0.34 0.34 0.30
ΔCCR.S 0.34 0.34 0.35 0.31
ΔLCCR.L 0.33 0.34 0.33 0.29
ΔLCCR.S 0.34 0.34 0.34 0.31
Control variables
Vol_ex_rate 0.65 0.70 0.63 0.57
Gap 0.64 0.59 0.62 0.65
Debt 0.58 0.57 0.59 0.52
Budget 0.56 0.51 0.56 0.56
Interest_rate 0.37 0.37 0.35 0.35
Fed_funds_rate 0.17 0.14 0.17 0.19
Inflation 0.49 0.44 0.47 0.51
Reserves 0.28 0.27 0.29 0.24
Vix 0.06 0.11 0.03 0.03
Lula 0.43 0.51 0.41 0.34
Subprime 0.05 0.04 0.06 0.03
Table 3. Pol_crisis 0.63 0.53 0.63 0.68
Correlations Note(s): Table prepared by the authors
negative (positive) outlook/credit watch status, are followed by an increase (decrease) in

disagreement about exchange rate expectations.
In order to avoid the possibility of spurious regressions, a first condition to be met before
applying the econometric analysis is to verify the stationarity of the series. Hence, we
performed the following unit roots tests (Table A3 in the Appendix): ADF, PP and KPSS.
Based on these tests, we observe that all the disagreement measures, the volatility of the
exchange rate, the vix, the inflation rate and the gap are I(0), while the other variables are I(1).
Thus, all the I(1) variables enter in the regressions in first difference (for instance,
ΔDebt 5 Debtt – Debtt1).
The first analysis of this study consists of estimating the effect of CCR variables on the
common trend of the disagreement about the exchange rate expectations. Therefore, we
estimate four equations based on the following model:
t ¼ β 0 þ β 1 ΔRatingt−1 þ β 2 Z þ εt
Disag ExPC (2)
where, Rating represents the CCR variables (CCR:S, CCR:L, LCCR:S and LCCR:L); ε is the
error term, and Z is the vector of control variables, which contains: Vol_ex_ratet1, Gapt1,
Inflationt1, ΔDebtt1, ΔBudgett1, ΔInterest_ratet1, ΔFed_funds_ratet1, ΔReservest1,
Vix, Lula, Pol_crisis and Subprime. One can observe that our vector of control variables
captures different aspects able to affect exchange rate expectations, such as: domestic
macroeconomic conditions, fiscal variables, monetary policy and external conditions. The
model is estimated considering the interest and control variables lagged in t1.
After that, we estimate the effect of sovereign credit news on the disagreement measures
for each forecasting horizon. This analysis allows us to see whether this effect differs
depending on the forecasting horizon. Hence, these estimates are based on the following
model:
Disag Exit ¼ γ 0 þ γ 1 ΔRatingt−1 þ β2 Zt þ μt (3)
where, i ¼ 12; 24 or 36 indicates the forecasting horizon of the disagreement measure. Again, Effects of
Rating represents the CCR variables (CCR:S, CCR:L, LCCR:S and LCCR:L); Z is the vector of sovereign
control variables described above, and μ is the error term.
Eqns (2) and (3) are estimated though ordinary least squares (OLS) and generalized
credit news by
method of moments (GMM). Both OLS and GMM are estimated with the Newey–West (HAC) CRAs
robust covariance matrix due to heteroscedasticity and autocorrelation problems. GMM
estimators are especially suitable to deal with endogeneity and identification problems
(Wooldridge, 2001). Regarding GMMs, we follow the methodology proposed by Johnston
(1984) to select the instruments on the GMM estimations. In other words, the instruments
were dated to past periods to guarantee exogeneity. In turn, overidentification has a crucial
role in the selection of the instrumental variables to improve efficiency of the estimated
coefficients. In this sense, a standard J-test is performed in order to test the hypothesis of valid
overidentification restrictions. Moreover, with the aim of removing any likelihood of
distortion in the results, the ratio between the number of instruments and the number of
observations is computed. Lastly, we performed the Durbin–Wu–Hausman test to examine
the endogeneity of the regressors.
3. Empirical results
Table 4 presents the results of the estimates related to Eqn (2), and Tables 5–7 present the
estimates related to Eqn (3) considering the disagreement measures for each forecasting
horizon (12, 24 and 36 months, respectively). Regarding all OLS estimates, one can observe
that the Ramsey test obtained for all models indicates that there are no specification problems
in the functional forms of the models.
With respect to the findings for the variables of interest, regardless of the method applied
or the CCR variable utilized, the results indicate that sovereign credit news matter to
determine the disagreement about exchange rate expectations. All coefficients for the rating
variables are negative and statistically significant. Thus, when a CRA signals an
improvement in a country’s sovereign risk (i.e. a positive ΔCCR), this signal represents a
perception of the CRA that the country’s macroeconomic fundamentals were improved and
the uncertainties about the country’s ability to honor its financial obligations are lower, which
therefore, reduces the uncertainties in the financial markets and the difficulties in the
expectations formation process, causing a reduction in the disagreement about the exchange
rate expectations. On the other hand, an increase in the sovereign risk perception among the
CRAs (i.e. a negative ΔCCR) is associated with a higher disagreement in expectations about
the future value of the exchange rate. In this sense, changes in sovereign credit news may
affect investors’ confidence and therefore the expectations formation process regarding the
exchange rate. These findings have practical implications for financial markets experts,
which, in an environment with a worse sovereign risk rating, face greater uncertainties and
difficulties in forming expectations. The findings also have practical implications for
policymakers (for instance, central banks), because, in an country with a worse sovereign risk
assessment, where agents find it difficult to form expectations about the exchange rate, thus
increasing the disagreement about exchange rate expectations, the monetary policy, for
instance, will have more difficulty in guiding inflation expectations.
With respect to the control variables, the estimates reveal the following results. In relation
to exchange rate volatility, the findings indicate that increases in Vol_ex_rate increase the
disagreement in expectations about the exchange rate. All estimated coefficients are positive
and in most cases, statistically significant (except those obtained by OLS for Disag_Ex36). In
turn, regarding the Gap, all coefficients obtained by OLS are negative and statistically
significant. Therefore, the results found for these variables are in line with the findings
presented by Oliveira and Curi (2016).
JES
Table 4.
exchange rate
disagreement in
on the general level of
expectations about the

Effect of CCR variables
Estimation method: OLS GMM
regressors Model 1 Model 2 Model 3 Model 4 Model 1 Model 2 Model 3 Model 4
Variables of C 0.926*** 0.930*** 0.925*** 0.932*** 1.824*** 1.790*** 1.985*** 1.819***

interest (0.313) (0.314) (0.314) (0.313) (0.425) (0.413) (0.442) (0.414)
ΔCCR.S (1) 1.014** 2.480***
(0.391) (0.909)
ΔCCR.L (1) 0.316** 0.890***
(0.135) (0.315)
ΔLCCR.S (1) 5.252** 14.050***
(2.066) (5.332)
ΔLCCR.L (1) 4.437** 12.568***
(1. 894) (4.488)
Control Vol_ex_rate (1) 15.390** 15.504** 15.423** 15.597** 17.579** 17.636** 17.163** 17.574**
variables (7.436) (7.426) (7.460) (7.417) (6.874) (7.004) (7.476) (7.102)
Gap (1) 6.49E-05*** 6.52E-05*** 6.50E-05*** 6.53E-05*** 2.42E-05 2.06E-05 3.82E-05 2.17E-05
(1.80E-05) (1.80E-05) (1.80E-05) (1.80E-05) (3.95E-05) (3.91E-05) (4.24E-05) (3.98E-05)
ΔDebt (1) 0.083** 0.082** 0.081** 0.083** 0.155*** 0.160*** 0.168*** 0.159***
(0.039) (0.039) (0.039) (0.039) (0.052) (0.055) (0.056) (0.055)
ΔBudget (1) 0.335 0.351 0.336 0.350 0.203 0.397 0.020 0.347
(0.235) (0.238) (0.235) (0.237) (0.475) (0.489) (0.491) (0.493)
ΔInterest rate (1) 0.500*** 0.502*** 0.501*** 0.501*** 0.827*** 0.826*** 0.791*** 0.820***
(0.158) (0.158) (0.158) (0.158) (0.168) (0.172) (0.170) (0.173)
ΔFed_funds_rate 0.928* 0.935* 0.923* 0.937* 1.942*** 1.947*** 1.969*** 1.987***
(1) (0.474) (0.477) (0.475) (0.476) (0.577) (0.601) (0.590) (0.602)
Inflation (1) 0.088** 0.088** 0.088** 0.089** 0.131*** 0.130*** 0.143*** 0.135***
(0.040) (0.041) (0.041) (0.041) (0.041) (0.041) (0.042) (0.041)
ΔReserves (1) 1.18E-05 1.14E-05 1.21E-05 1.16E-05 7.37E-06 5.96E-06 3.12E-06 5.71E-06
(1.77E-05) (1.78E-05) (1.77E-05) (1.78E-05) (2.59E-05) 2.68E-05 (2.69E-05) (2.70E-05)
Vix 0.760 0.764 0.767 0.771 0.346 0.341 0.251 0.348
(0.730) (0.737) (0.734) (0.738) (0.677) (0.665) (0.660) (0.668)
Lula 4.022*** 4.036*** 4.026*** 4.009*** 4.144*** 4.091*** 4.128*** 4.026***
(0.687) (0.690) (0.686) (0.689) (0.638) (0.628) (0.681) (0.630)
Subprime 0.808** 0.810** 0.808** 0.810** 0.768* 0.783* 0.761* 0.789*
(continued )
(0.317) (0.321) (0.320) (0.322) (0.411) (0.416) (0.460) (0.420)

Pol_ crisis 2.252*** 2.258*** 2.257 2.256*** 3.786*** 3.748*** 3.945*** 3.764
(0.401) (0.404) (0.401) (0.404) (0.632) (0.620) (0.660) (0.638)
Estimation Adj. R2 0.763 0.762 0.763 0.762 0.649 0.643 0.619 0.640
statistics F-statistic 48.823 48.573 48.740 48.621
Prob (F-statistic) (0.000) (0.000) (0.000) (0.000)
LM test 92.520 93.856 92.734 94.535
Prob (LM test) (0.000) (0.000) (0.000) (0.000)
ARCH test 42.629 43.205 43.883 43.538
Prob (ARCH) (0.000) (0.000) (0.000) (0.000)
Ramsey test 0.402 0.554 0.360 0.483
Prob (Ramsey test) (0.527) (0.458) (0.549) (0.488)
J-statistic 20.748 19.835 18.681 19.506
Prob (J-statistic) (0.836) (0.870) (0.908) (0.882)
D-W-H test 2.676 3.081 3.306 3.020
Prob (D-W-H) (0.999) (0.998) (0.997) (0.998)
No. Obs 188 188 188 188
No.Instr 42 42 42 42
Note(s): Table prepared by the authors. Marginal significance levels: *** denotes 0.01, ** denotes 0.05 and * denotes 10%. Standard errors are in parentheses and
t-statistics are in square brackets. Prob (F-statistic) reports the p-value of the F-test. Prob (J-statistic) reports the p-valued of the J-test. Prob (LM) reports the p-value of the
LM-test to detect serial autocorrelation. Prob (ARCH) reports the p-value of the ARCH-test to detect heteroskedasticity. D-W-H test is the Durbin–Wu–Hausman test
(difference in J-stats) and null hypothesis is that the regressors are exogenous. Prob (D-W-H) reports the p-value of the D-W-H-test. Table A4 (Appendix) presents the list of
instruments used in all GMM estimates
sovereign
credit news by
CRAs
Effects of
JES
Table 5.
12 months ahead
exchange rate for
on the disagreement in
Variables of C 0.546*** 0.546*** 0.547*** 0.546*** 0.454*** 0.433*** 0.443*** 0.419***

interest (0.074) (0.074) (0.074) (0.074) (0.117) (0.106) (0.095) (0.105)
ΔCCR.S (1) 0.139* 0.741**
(0.072) (0.307)
ΔCCR.L (1) 0.047** 0.236**
(0.024) (0.094)
ΔLCCR.S (1) 0.710* 4.304***
(0.376) (1.638)
ΔLCCR.L (1) 0.656* 3.428***
(0.335) (1.308)
Control Vol_ex_rate (1) 4.321*** 4.323*** 4.327*** 4.339*** 5.963** 4.765* 5.478** 4.940***
variables (1.555) (1.553) (1.558) (1.551) (2.538) (2.475) (2.397) (2.347)
Gap (1) 1.34E-05*** 1.34E-05*** 1.34E-05*** 1.35E-05*** 2.88E-06 2.01E-06 9.04E-07 2.64E-06
(3.59E-06) (3.58E-06) (3.60E-06) (3.58E-06) (7.53E-06) (7.66E-06) (6.62E-06) (7.54E-06)
ΔDebt (1) 0.018 0.018 0.017 0.018 0.041** 0.037** 0.028* 0.035**
(0.011) (0.011) (0.011) (0.012) (0.016) (0.016) (0.016) (0.016)
ΔBudget (1) 0.047 0.050 0.048 0.050 0.020 0.034 0.011 0.027
(0.048) (0.047) (0.048) (0.048) (0.123) (0.117) (0.097) (0.109)
ΔInterest_rate (1) 0.066** 0.066** 0.066** 0.066** 0.133** 0.142*** 0.134*** 0.141***
(0.033) (0.033) (0.033) (0.038) (0.053) (0.054) (0.051) (0.052)
ΔFed_funds_rate 0.263** 0.263** 0.262** 0.263** 0.431** 0.378* 0.390** 0.382**
(1) (0.117) (0.117) (0.117) (0.117) (0.191) (0.196) (0.179) (0.191)
Inflation (1) 0.006 0.006 0.005 0.006 0.003 0.002 0.002 0.003
(0.009) (0.009) (0.009) (0.009) (0.016) (0.015) (0.013) (0.014)
(3.55E-06) (3.56E-06) (3.56E-06) (3.56E-06) (7.06E-06) (6.91E-06) (6.54E-06) (6.61E-06)
Vix 0.014 0.016 0.014 0.017 0.432* 0.430* 0.449* 0.444*
(0.153) (0.154) (0.153791) (0.154) (0.243) (0.235) (0.230) (0.228)
Lula 0.839*** 0.840*** 0.840*** 0.836*** 0.708* 0.868** 0.723** 0.830**
(0.177) (0.178) (0.177) (0.178) (0.373) (0.364) (0.319) (0.332)
Subprime 0.105* 0.106* 0.105* 0.106* 0.197 0.193 0.178 0.194
(continued )
(0.055) (0.055) (0.055) (0.055) (0.149) (0.142) (0.140) (0.137)

Pol_crisis 0.346*** 0.346*** 0.347*** 0.346*** 0.597*** 0.586*** 0.609*** 0.594***
(0.083) (0.083) (0.083) (0.083) (0.109) (0.106) (0.097) (0.098)
Estimation Adj.R2 0.689 0.689 0.689 0.689 0.474 0.508 0.466 0.498
Prob (F-statistic) (0.000) (0.000) (0.000) (0.000)
LM test 78.147 78.659 78.488 78.991
Prob (LM test) (0.000) (0.000) (0.000) (0.000)
ARCH test 36.121 36.280 36.398 36.116
Prob (ARCH) (0.000) (0.000) (0.000) (0.000)
Ramsey test 0.514 0.591 0.472 0.558
Prob (Ramsey test) (0.443) (0.443) (0.493) (0.456)
J-statistic 17.012 17.299 16.966 16.758
prob (J-statistic) (0.909) (0.900) (0.949) (0.953)
D-W-H test 9.340 9.123 9.453 8.099
Prob (D-W-H) (0.809) (0.823) (0.801) (0.884)
No. Obs 186 186 186 186
No. Instr 40 40 42 42
sovereign
credit news by
CRAs
Effects of
JES
Table 6.
24 months ahead
exchange rate for
Variables C 0.707*** 0.706*** 0.707*** 0.706*** 0.695*** 0.695*** 0.700*** 0.689***

of interest (0.073) (0.073) (0.073) (0.073) (0.091) (0.090) (0.092) (0.090)
ΔCCRS (1) 0.239*** 0.536***
(0.086) (0.190)
ΔCCRl (1) 0.075** 0.161***
(0.030) (0.058)
ΔLCCRS (1) 1.249*** 2.965***
(0.453) (0.952)
ΔLCCRL (1) 1.054** 2.369***
(0.424) (0.840)
Control Vol_ex_rate (1) 3.147* 3.172* 3.152* 3.194* 5.079** 4.749* 4.697* 4.790*
variables (1.797) (1.791) (1.802) (1.791) (2.528) (2.466) (2.502) (2.488)
Gap (1) 1.40E-05*** 1.40E-05*** 1.40E-05*** 1.41E-05*** 1.95E-06 3.02E-06 2.97E-06 2.71E-06
(4.80E-06) (4.80E-06) (4.82E-06) (4.80E-06) (6.88E-06) (6.81E-06) (6.60E-06) (6.86E-06)
ΔDebt (1) 0.017* 0.017* 0.016* 0.017* 0.012 0.011 0.007 0.011
(0.009) (0.010) (0.009) (0.009) (0.018) (0.018) (0.017) (0.018)
ΔBudget (1) 0.119* 0.123* 0.119* 0.123* 0.199 0.212* 0.197 0.213*
(0.064) (0.065) (0.064) (0.065) (0.128) (0.128) (0.124) (0.128)
ΔIntrest_rate (1) 0.123*** 0.123*** 0.123*** 0.123*** 0.273*** 0.269*** 0.273*** 0.271***
(0.043) (0.043) (0.043) (0.043) (0.046) (0.047) (0.045) (0.047)
ΔFed funds rate 0.164 0.166 0.163 0.166 0.378** 0.349** 0.384** 0.350**
(1) (0.109) (0.110) (0.109) (0.110) (0.148) (0.148) (0.154) (0.149)
Inflation (1) 0.020** 0.020** 0.020** 0.021** 0.008 0.009 0.007 0.010
(0.009) (0.009) (0.009) (0.009) (0.010) (0.010) (0.010) (0.010)
ΔReserves (1) 5.00E-06 4.90E-06 5.07E-06 4.94E-06 1.25E-05** 1.21E-05* 1.17E-05* 1.22E-05*
(4.52E-06) (4.56E-06) (4.51E-06) (4.55E-06) (6.12E-06) (6.25E-06) (6.32E-06) (6.25E-06)
Vix 0.244 0.245 0.246 0.247 0.084 0.094 0.063 0.091
(0.177) (0.179) (0.178) (0.179) (0.217) (0.215) (0.216) (0.216)
Lula 0.891*** 0.894*** 0.892*** 0.888*** 1.174*** 1.204*** 1.201*** 1.194***
(0.153) (0.153) (0.153) (0.153) (0.283) (0.280) (0.276) (0.282)
Subprime 0.184** 0.185** 0.184** 0.185** 0.081 0.078 0.089 0.073
(continued )
(0.080) (0.081) (0.080) (0.081) (0.123) (0.121) (0.123) (0.122)

Pol_crisis 0.513*** 0.514*** 0.514*** 0.514*** 0.691*** 0.694*** 0.695*** 0.692***
(0.098) (0.099) (0.098) (0.100) (0.101) (0.099) (0.100) (0.099)
Estimation Adj.R2 0.724 0.723 0.724 0.724 0.654 0.659 0.654 0.656
statics F-statistic 39.975 39.800 39.940 39.841
Prob (F-statistic) (0.000) (0.000) (0.000) (0.000)
LM test 100.755 101.725 101.001 102.613
Prob (LM test) (0.000) (0.000) (0.000) (0.000)
ARCH test 32.588 32.617 33.428 32.933
Prob (ARCH) (0.000) (0.000) (0.000) (0.000)
Ramsey test 0.588 0.687 0.541 0.625
Prob (Ramsey test) (0.444) (0.408) (0.463) (0.430)
J-statistic 23.282 23.500 22.600 23.658
Prob (J-statistic) (0.670) (0.658) (0.706) (0.649)
D-W-H test 5.361 5.097 5.821 5.124
Prob (D-W-H) (0.966) (0.973) (0.952) (0.972)
No. Obs 186 186 186 186
No.Instr 41 41 41 41
sovereign
credit news by
CRAs
Effects of
JES
Table 7.
36 months ahead
exchange rate for
Variables of C 0.698*** 0.697*** 0.698*** 0.696*** 0.437*** 0.442*** 0.420*** 0.440***

interest (0.073) (0.073) (0.073) (0.073) (0.103) (0.104) (0.104) (0.104)
ΔCCR.S (1) 0.325** 0.513***
(0.150) (0.167)
ΔCCR.L (1) 0.095* 0.155***
(0.050) (0.056)
ΔLCCR.S (1) 1.684** 2.466***
(0.793) (0.919)
ΔLCCR.L (1) 1.348** 2.160***
(0.710) (0.785)
Control Vol_ex_rate (1) 2.514 2.572 2.525 2.597 3.462* 3.656** 3.196* 3.610*
variables (2.378) (2.360) (2.385) (2.358) (1.817) (1.831) (1.869) (1. 848)
Gap (1) 1.63E-05*** 1.64E-05*** 1.63E-05*** 1.65E-05*** 1.17E-05 1.07E-05 1.25E-05 1.07E-05
(5.04E-06) (5.06E-06) (5.06E-06) (5.06E-06) (9.18E-06) (9.39E-06) (9.25E-06) (9.51E-06)
ΔDebt (1) 0.022** 0.021** 0.021** 0.022** 0.038** 0.040** 0.035** 0.039**
(0.009) (0.009) (0.009) (0.009) (0.016) (0.016) (0.015) (0.016)
ΔBudget (1) 0.057 0.061 0.057 0.061 0.104 0.127 0.103 0.121
(0.068) (0.070) (0.068) (0.070) (0.133) (0.133) (0.132) (0.134)
ΔInterest_rate (1) 0.158*** 0.159*** 0.158*** 0.158*** 0.209*** 0.207*** 0.199*** 0.206***
(0.042) (0.042) (0.042) (0.042) (0.050) (0.050) (0.050) (0.050)
ΔFed_funds_rate 0.180 0.184 0.179 0.184 0.391** 0.435** 0.386** 0.450**
(1) (0.132) (0.132) (0.131) (0.132) (0.197) (0.203) (0.191) (0.203)
Inflation (1) 0.038*** 0.038*** 0.038*** 0.038*** 0.051*** 0.050*** 0.053*** 0.050***
(0.010) (0.010) (0.010) (0.010) (0.012) (0.013) (0.013) (0.013)
(5.03E-06) (5.07E-06) (5.01E-06) (5.06E-06) (6.99E-06) (7.26E-06) (7.12E-06) (7.19E-06)
Vix 0.288 0.285 0.289 0.288 0.127 0.118 0.126 0.121
(0.181) (0.184) (0.182) (0.184) (0.179) (0.181) (0.179) (0.182)
Lula 0.968*** 0.974*** 0.969*** 0.966*** 0.859*** 0.860*** 0.878*** 0.857***
(0.163) (0.164) (0.163) (0.163) (0.158) (0.154) (0.159) (0.154)
Subprime 0.275*** 0.274*** 0.275*** 0.274*** 0.270* 0.261* 0.292* 0.266*
(continued )
(0.096) (0.097) (0.097) (0.097) (0.147) (0.150) (0.148) (0.150)

Pol_crisis 0.693*** 0.697*** 0.695*** 0.696*** 1.152*** 1.164*** 1.171*** 1.167***
(0.110) (0.111) (0.110) (0.111) (0.127) (0.130) (0.127) (0.133)
Estimation Adj. R2 0.770 0.768 0.770 0.768 0.663 0.656 0.661 0.656
Prob (F-statistic) (0.000) (0.000) (0.000) (0.000)
LM test 101.200 102.449 100.827 103.008
Prob (LM test) (0.000) (0.000) (0.000) (0.000)
ARCH test 25.349 26.198 26.071 26.539
Prob (ARCH) (0.000) (0.000) (0.000) (0.000)
Ramsey test 0.207 0.056 0.229 0.098
Prob (Ramsey test) (0.650) (0.814) (0.633) (0.755)
J-statistic 18.305 17.017 18.476 16.871
Prob (J-statistic) (0.966) (0.980) (0.963) (0.982)
D-W-H test 5.361 5.609 5.818 5.760
Prob (D-W-H) (0.967) (0.959) (0.953) (0.954)
No. Obs 188 188 188 188
No. Instr 45 45 45 45
sovereign
credit news by
CRAs
Effects of
JES With respect to the fiscal variables, the results reveal that positive changes in public debt
raise the disagreement in expectations about the exchange rate. All coefficients for ΔDebt are
positive and statistically significant in the estimates for both Disag_Ex36 and Disag_Expc. In
turn, regarding Disag_Ex12, the significant coefficients are those obtained by GMM, and in
the case of Disag_Ex24, the significant coefficients are those obtained by OLS. On the other
hand, with respect to ΔBudget, the findings indicate a weak evidence for the effect of this
variable on the disagreements in expectations about the exchange rate, since it shows
significance only in the OLS estimations for the disagreement of 24 months ahead.
The estimates for the effects of monetary policy present negative and statistically
significant coefficients for ΔInterest_rate in all cases, indicating that positive variations in the
basic interest rate (generally used to control inflation) reduce the uncertainties related to what
is expected to be the exchange rate in the future. On the other hand, positive variations in the
US monetary policy interest rate cause an increase in the disagreement in expectations about
the exchange rate, where this result is verified with more significance for the Disag_Ex12, as
well as for the general level of disagreement (Disag_Expc). This result occurs, because with an
increase in the US monetary policy interest rate, capital flight is expected, increasing the
uncertainty regarding the behavior of the exchange rate in the future and increasing the
disagreement in expectations.
With respect to the coefficients obtained for the inflation rate, the findings indicate, with
statistical significance, that increases in this variable will increase the general level of
disagreement in expectations about the exchange rate as well the Disag_Ex36. In turn, the
Disag_Ex12 is not affected by inflation, and in the case of Disag_Ex24, the statistical
significance is verified only in OLS estimates.
Regarding the effects of the Vix and the variations of international reserves, the results are
not conclusive since most of the coefficients are not statistically significant.
The estimated coefficients for the dummy variables used to capture the uncertainties
related to the 2002 elections (“Lula effect”), the global financial crisis (“Subprime”) and the
2015 political crisis (“Pol_crisis”) are, in most cases, statistically significant and positive,
indicating that these events generated uncertainties to the expectations formation process
about the exchange rate and, consequently, increased the disagreement in expectations about
the exchange rate in all cases. For this set of variables, the results that most call attention are
those related to the “Lula effect” and the political crisis observed in 2015. The findings for the
dummy variable “Lula” are in agreement with the results presented by Oliveira and Curi
(2016), revealing that the confidence crisis triggered by the possibility that the candidate Luiz
Inacio Lula da Silva could win the 2002 presidential elections in Brazil brought uncertainties
about the exchange rate in the future. Our estimates also reveal that the 2015 political crisis
was responsible for creating uncertainties in the expectations formation process about the
exchange rate.
In order to verify the existence of inertia in the disagreement in expectations about the
exchange rate and also to check if the main results related to the CCR variables are confirmed,
we also estimate dynamic models through GMM (where the lagged dependent variable enters
the estimates as a regressor). Tables 8–11 present the estimates for the Disag_Expc,
Disag_Ex12, Disag_Ex24 and Disag_Ex36, respectively.
With respect to the CCR variables, the estimates corroborate the results previously
reported. The coefficients for the effects of ΔCCR variables on the general level of the
disagreement in expectations about the exchange rate (Table 7) and on the disagreements for
different forecasting horizons (Tables 8–10) are negative and statistically significant in all
cases. Thus, improvements in CCR variables, i.e. positive sovereign credit news given by a
rating upgrade or a positive status in the outlook/credit watch, reduce the disagreement in
expectations about the exchange rate. On the other hand, an increase in the sovereign risk
perception among the CRAs (i.e. a negative ΔCCR) is associated with a higher disagreement
Estimation method: GMM
Effects of
regressors Model 1 Model 2 Model 3 Model 4 sovereign
credit news by
Variables of C 0.660** 0.652*** 0.715*** 0.651***
interest (0.257) (0.242) (0.273) (0.241) CRAs
Disag_pc (1) 0.674*** 0.675*** 0.670*** 0.678***
(0.086) (0.080) (0.081) (0.079)
ΔCCR.S (1) 1,737***
(0.546)
ΔCCR.L (1) 0.611***
(0.186)
ΔLCCR.S (1) 9.622***
(3.216)
ΔLCCR.L (1) 8.599***
(2.558)
Control variables Vol_ex_rate (1) 5.238 5.340 5.661 5.275
(4.320) (4.084) (4.545) (4.060)
Gap (1) 2.73E-05 2.55E-05 2.70E-05 2.52E-05
(2.65E-05) (2.48E-05) (2.78E-05) (2.47E-05)
ΔDebt (1) 0.075* 0.086** 0.085** 0.087**
(0.042) (0.041) (0.042) (0.040)
ΔBudget (1) 0.823** 0.679* 0.877** 0.655*
(0.373) (0.357) (0.386) (0.357)
ΔInterest_rate (1) 0.191** 0.195** 0.178* 0.197**
(0.085) (0.083) (0.090) (0.082)
ΔFed_funds_rate (1) 0.289 0.368 0.488 0.366
(0.480) (0.480) (0.464) (0.476)
Inflation (1) 0.051** 0.053** 0.058** 0.054**
(0.022) (0.021) (0.023) (0.021)
ΔReserves (1) 2.18E-05 1.97E-05 1.61E-05 2.01E-05
(1.57E-05) (1.51E-05) (1.62E-05) (1.50E-05)
Vix 0.896* 0.773* 0.873* 0.758*
(0.471) (0.460) (0.443) (0.457)
Lula 0.855* 0.928* 0.981** 0.892*
(0.495) (0.481) (0.484) (0.469)
Sub prime 0.439 0.336 0.405 0.337
(0.301) (0.298) (0.288) (0.299)
Pol_crisis 1.631*** 1.584*** 1.628*** 1.569***
(0.542) (0.502) (0.550) (0.500)
Estimation Adj.R2 0.861 0.865 0.858 0.866
statistics J-statistic 13.874 13.647 13.299 13.736
Prob (J-statistic) 0.975 (0.977) (0.981) (0.976)
D-W-H test 8.398 7.776 8.140 7.809
Prob (D-W-H) (0.907) (0.933) (0.918) (0.931)
No. Obs 188 188 188 188
No. Instr 41 41 41 41
Note(s): Table prepared by the authors. Marginal significance levels: *** denotes 0.01, ** denotes 0.05 and * Table 8.
denotes 10%. Standard errors are in parentheses and t-statistics are in square brackets. Prob (F-statistic) Dynamic models: effect
reports the p-value of the F-test. Prob (J-statistic) reports the p-valued of the J-test. Prob (LM) reports the p-value of CCR variables on the
of the LM-test to detect serial autocorrelation. Prob (ARCH) reports the p-value of the ARCH-test to detect general level of
heteroskedasticity. D-W-H test is the Durbin–Wu–Hausman test (difference in J-stats) and null hypothesis is disagreement in
that the regressors are exogenous. Prob (D-W-H) reports the p-value of the D-W-H-test. Table A8 (Appendix) expectations about the
presents the list of instruments used in all GMM estimates exchange rate
JES Estimation method: GMM
regressors Model 1 Model 2 Model 3 Model 4
Variables of interest C 0.213* 0.178* 0.137 0.180**

(0.118) (0.093) (0.105) (0.094)
Disag_12 (1) 0.407*** 0.481*** 0.449*** 0.474***
(0.155) (0.128) (0.150) (0.131)
ΔCCR. S (1) 0.406*
(0.206)
ΔCCR.L (1) 0.157**
(0.063)
ΔLCCR.S (1) 1.676*
(0.904)
ΔLCCR.L (1) 2.297**
(0.913)
Control variables Vol_ex_rate (1) 2.909 1.566 3.603* 1.668
(2.136) (1.603) (2.040) (1.603)
Gap (1) 7.59E-06 3.01E-06 1.13E-05 3.05E-06
(7.35E-06) (4.92E-06) (7.22E-06) (4.99E-06)
ΔDebt (1) 0.023* 0.024* 0.024* 0.024*
(0.013) (0.015) (0.014) (0.015)
ΔBudget (1) 0.056 0.122 0.047 0.121
(0.100) (0.096) (0.099) (0.097)
ΔInterest_rate (1) 0.092** 0.119*** 0.095** 0.119***
(0.044) (0.041) (0.047) (0.041)
ΔFed_funds_rate (1) 0.361** 0.348* 0.421** 0.351**
(0.171) (0.185) (0.170) (0.186)
Inflation (1) 0.003 0.002 0.001 0.001
(0.007) (0.007) (0.007) (0.007)
ΔReserves (1) 8.53E-06* 7.54E-06 8.96E-06* 7.71E-06
(4.88E-06) (5.02E-06) (4.83E-06) (5.06E-06)
Vix 0.510** 0.562*** 0.565** 0.565***
(0.228) (0.210) (0.238) (0.213)
Lula 0.423 0.632* 0.343 0.621*
(0.301) (0.334) (0.296) (0.333)
Subprime 0.169 0.188 0.192 0.191
(0.135) (0.127) (0.135) (0.128)
Pol_crisis 0.486*** 0.318*** 0.510*** 0.318***
(0.124) (0.118) (0.128) (0.119)
Estimation statistics Adj.R2 0.711 0.747 0.700 0.741
J-statistic 13.349 13.395 13.329 13.369
Prob (J-statistic) (0.944) (0.959) (0.960) (0.960)
D-W-H test 8.205 8.209 7.687 8.210
Prob (D-W-H) (0.878) (0.915) (0.905) (0.9151)
No. Obs 186 186 186 186
No. Instr 38 39 39 39
Table 9. Note(s): Table prepared by the authors. Marginal significance levels: *** denotes 0.01, ** denotes 0.05 and *
Dynamic models: effect denotes 10%. Standard errors are in parentheses and t-statistics are in square brackets. Prob (F-statistic)
of CCR variables on the reports the p-value of the F-test. Prob (J-statistic) reports the p-valued of the J-test. Prob (LM) reports the p-value
disagreement in of the LM-test to detect serial autocorrelation. Prob (ARCH) reports the p-value of the ARCH-test to detect
expectations about the heteroskedasticity. D-W-H test is the Durbin–Wu–Hausman test (difference in J-stats) and null hypothesis is
exchange rate for that the regressors are exogenous. Prob (D-W-H) reports the p-value of the D-W-H-test. Table A9 (Appendix)
12 months ahead presents the list of instruments used in all GMM estimates
Estimation method: GMM
Effects of
regressors Model 1 Model 2 Model 3 Model 4 sovereign
credit news by
Variables of interest C 0.176 0.184 0.121* 0.135*
(0.115) (0.117) (0.070) (0.071) CRAs
Disag_24 (1) 0.659*** 0.660*** 0.758*** 0.763***
(0.111) (0.113) (0.089) (0.085)
ΔCCR.S (1) 0.465**
(0.221)
ΔCCR.L (1) 0.155**
(0.077)
ΔLCCR.S (1) 2.094**
(0.929)
ΔLCCR.L (1) 1.420**
(0.633)
Control Vol_ex_rate (1) 2.215 2.671 1.604 1.159
variables (1.772) (1.642) (1.577) (1.254)
Gap (1) 6.17E-06 5.07E-06 4.58E-06 2.74E-06
(5.58E-06) (5.72E-06) (4.99E-06) (4.35E-06)
ΔDebt (1) 0.021* 0.020* 0.020* 0.021*
(0.012) (0.012) (0.011) (0.011)
ΔBudget (1) 0.217** 0.207* 0.152* 0.081
(0.105) (0.106) (0.092) (0.081)
ΔInterest_rate (1) 0.071* 0.072* 0.050** 0.054**
(0.037) (0.038) (0.024) (0.025)
ΔFed_funds_rate (1) 0.017 0.068 0.042 0.033
(0.128) (0.124) (0.104) (0.088)
Inflation (1) 0.010 0.010 0.008 0.007
(0.008) (0.008) (0.006) (0.004)
ΔReserves (1) 1.05E-05* 1.07E-05** 7.85E-06* 9.92E-06**
(5.42E-06) (5.43E-06) (4.40E-06) (4.41E-06)
Vix 0.284** 0.248* 0.203* 0.179*
(0.141) (0.138) (0.121) (0.104)
Lula 0.263 0.319 0.107 0.117
(0.266) (0.266) (0.182) (0.140)
Subprime 0.133 0.132 0.113 0.105
(0.084) (0.082) (0.075) (0.072)
Pol_crisis 0.339*** 0.333*** 0.253*** 0.218***
(0.096) (0.097) (0.090) (0.072)
Estimation Adj.R2 0.819 0.818 0.859 0.876
Prob (J-statistic) (0.994) (0.991) (0.982) (0.960)
D-W-H test 14.353 14.082 13.907 13.294
Prob (D-W-H) (0.499) (0.519) (0.533) (0.580)
No. Obs 186 186 186 186
No. Instr 39 39 39 41
Note(s): Table prepared by the authors. Marginal significance levels: *** denotes 0.01, ** denotes 0.05 and * Table 10.
denotes 10%. Standard errors are in parentheses and t-statistics are in square brackets. Prob (F-statistic) Dynamic models: effect
reports the p-value of the F-test. Prob (J-statistic) reports the p-valued of the J-test. Prob (LM) reports the p-value of CCR variables on the
of the LM-test to detect serial autocorrelation. Prob (ARCH) reports the p-value of the ARCH-test to detect disagreement in
heteroskedasticity. D-W-H test is the Durbin–Wu–Hausman test (difference in J-stats) and null hypothesis is expectations about the
that the regressors are exogenous. Prob (D-W-H) reports the p-value of the D-W-H-test. Table A10 (Appendix) exchange rate for
presents the list of instruments used in all GMM estimates 24 months ahead
JES Estimation method: GMM
regressors Model 1 Model 2 Model 3 Model 4
Variables of C 0.228*** 0.233*** 0.290*** 0.227***

interest (0.082) (0.079) (0.092) (0.078)
Disag_36 (1) 0.566*** 0.569*** 0.509*** 0.572***
(0.102) (0.098) (0.109) (0.099)
ΔCCR.S (1) 0.458***
(0.119)
ΔCCR.L (1) 0.152***
(0.041)
ΔLCCR.S (1) 2.397***
(0.647)
ΔLCCR.L (1) 2.032***
(0.561)
Control Vol_ex_rate (1) 0.836 0.962 0.910 1.045
variables (1.111) (1.078) (1.152) (1.045)
Gap (1) 3.06E-06 2.39E-06 6.39E-07 2.38E-06
(4.72E-06) (4.59E-06) (4.83E-06) (4.64E-06)
ΔDebt (1) 0.015 0.016 0.009 0.016*
(0.011) (0.010) (0.010) (0.010)
ΔBudget (1) 0.087 0.052 0.092 0.044
(0.104) (0.102) (0.105) (0.101)
ΔInterest_rate (1) 0.068** 0.070** 0.078*** 0.068**
(0.033) (0.031) (0.030) (0.029)
ΔFed_funds_rate (1) 0.0001 0.009 0.021 0.013
(0.130) (0.131) (0.143) (0.130)
Inflation (1) 0.024*** 0.024*** 0.023*** 0.024***
(0.006) (0.006) (0.006) (0.006)
ΔReserves (1) 6.36E-06* 6.65E-06* 7.51E-06** 6.88E-06*
(3.73E-06) (3.57E-06) (3.75E-06) (3.73E-06)
Vix 0.061 0.041 0.057 0.038
(0.101) (0.097) (0.102) (0.095)
Lula 0.225 0.257** 0.325** 0.264**
(0.140) (0.129) (0.134) (0.123)
Subprime 0.012 0.007 0.005 0.009
(0.083) (0.078) (0.085) (0.077)
Pol_crisis 0.477*** 0.468*** 0.524*** 0.470***
(0.140) (0.134) (0.146) (0.136)
Estimation Adj.R2 0.874 0.875 0.867 0.877
Prob (J-statistic) (0.984) (0.984) (0.991) (0.986)
D-W-H test 9.436 8.940 11.565 8.809
Prob (D-W-H) (0.854) (0.881) (0.712) (0.887)
No. Obs 188 188 188 188
No. Instr 44 44 43 44
Table 11. Note(s): Table prepared by the authors. Marginal significance levels: *** denotes 0.01, ** denotes 0.05 and *
Dynamic models: effect denotes 10%. Standard errors are in parentheses and t-statistics are in square brackets. Prob (F-statistic)
of CCR variables on the reports the p-value of the F-test. Prob (J-statistic) reports the p-valued of the J-test. Prob (LM) reports the p-value
disagreement in of the LM-test to detect serial autocorrelation. Prob (ARCH) reports the p-value of the ARCH-test to detect
expectations about the heteroskedasticity. D-W-H test is the Durbin–Wu–Hausman test (difference in J-stats) and null hypothesis is
exchange rate for that the regressors are exogenous. Prob (D-W-H) reports the p-value of the D-W-H-test. Table A11 (Appendix)
36 months ahead presents the list of instruments used in all GMM estimates
in expectations about the future value of the exchange rate. In this sense, the findings suggest Effects of
that changes in sovereign credit news are able to affect the expectations formation process of sovereign
financial market experts about the exchange rate.
Regarding the control variables, the findings reveal positive and significant coefficients for
credit news by
Δdebt (except for three coefficients obtained from the estimates for Disag_Ex36), suggesting that CRAs
when the gross public debt increases the disagreements in expectations about the exchange rate
also increases. On the other hand, the coefficients for ΔBudget present statistical significance in
the estimation of the common trend, as well as the disagreement for 24 months ahead.
The results also reinforce the previous estimates for the effects of monetary policy. All
estimated coefficients are negative and significant. Thus, the findings reveal that positive
changes in the monetary policy interest rate (ΔInterest_rate) reduce the disagreements in
expectations about the exchange rate. In turn, regarding the effects of changes in the international
interest rate (ΔFed_funds_rate), only the coefficients obtained from the estimates for Disag_Ex12
are positive and statistically significant.
The estimates for the Inflation variable corroborate the results previously reported. In turn,
analyzing the results for ΔReserves, one can observe that the accumulation of international
reserves reduces the disagreements in expectations about the exchange rate. Most coefficients are
negative and statistically significant (except those obtained for Disag_Expc).
With the exception of the results when the dependent variable is Disag_Ex36, the findings
show that the global uncertainties (captured by the Vix) increased the Disag_Expc, the
Disag_Ex12 and the Disag_Ex24. In relation to domestic uncertainties, the estimates show that
the 2015 political crisis that led to the impeachment of the president of the republic (captured
by the dummy variable Pol_crisis) generated uncertainties in the expectations formation
process about the exchange rate – all estimated coefficients are positive and statistically
significant. Regarding the “Lula” effect, the findings present mixed results. The strong
significance of this variable to explain the common trend of the disagreement is not verified
when the dependent variable is distinguished by different forecasting horizons, especially in
the estimations of the disagreement for 12 months ahead.
4. Dynamic analyses through vector autoregressive

In order to provide robustness to our results and to observe the dynamic behavior of the
relationship between sovereign credit news and the disagreement in expectations about the
exchange rate, we performed a vector autoregressive (VAR) analysis. The VAR dynamic analysis
through impulse-response functions permits the evaluation of the impulse on key variables
caused by innovations (or shocks) of the residual variables over time (Sims, 1980). The traditional
method applies the “orthogonality assumption” and, therefore, the results may depend on how the
variables are ordered in the VAR framework. We avoid this issue by implementing the
generalized impulse response (GIR) function. According to Koop et al. (1996) and Pesaran and Shin
(1998), the GIR function is invariant to any re-ordering of the variables in the VAR.
We conducted several impulse-response analyses changing only the CCR variable and the
disagreement measure. The lag order of all VARs was determined based on the Hannan–Quinn
(HQ) information criterion, which is consistent and suitable for small samples. This criterion
indicates that the lag order is equal to 2 to all VARs (see Tables A12–A15 in the Appendix). In
addition, all roots of all VARs respect the stability condition (see Figures A1–A4). Since our main
goal is to examine the effect of sovereign credit news on the disagreement in expectations about
the exchange rate, we show only the disagreement response to innovations in the CCR variables.
Figure 3 plots the impulse-response functions given by innovations on the rating
variables on the general level of the disagreement about exchange rate expectations. In turn,
Figures 4–6 plot the impulse-response functions given by innovations on the rating variables
on the disagreement in expectations about the exchange rate for 12, 24 and 36 months ahead,
JES Response to ∆CCR.S
0.1
Response to ∆CCR.L
0.1
0.0 0.0
-0.1 -0.1
-0.2 -0.2
-0.3 -0.3
-0.4 -0.4
2 4 6 8 10 12 14 16 18 20 22 24 2 4 6 8 10 12 14 16 18 20 22 24
Response to ∆LCCR.S Response to ∆LCCR.L

0.1 0.1
0.0 0.0
-0.1 -0.1
-0.2 -0.2
Figure 3.
Impulse-response -0.3 -0.3
functions - Disag ExPC
and the CCR variables -0.4 -0.4
2 4 6 8 10 12 14 16 18 20 22 24 2 4 6 8 10 12 14 16 18 20 22 24
Response to ∆CCR.S Response to ∆CCR.L

0.02 0.02
0.00 0.00
-0.02 -0.02
-0.04 -0.04
-0.06 -0.06
-0.08 -0.08
2 4 6 8 10 12 14 16 18 20 22 24 2 4 6 8 10 12 14 16 18 20 22 24

0.02 0.02
0.00 0.00
-0.02 -0.02
-0.04 -0.04
Figure 4.
Impulse-response -0.06 -0.06
functions - Disag Ex12
and the CCR variables -0.08 -0.08
2 4 6 8 10 12 14 16 18 20 22 24 2 4 6 8 10 12 14 16 18 20 22 24
Response to ∆CCR.S Response to ∆CCR.L Effects of
0.02 0.02
sovereign
0.00 0.00 credit news by
-0.02 -0.02 CRAs
-0.04 -0.04
-0.06 -0.06
-0.08 -0.08
-0.10 -0.10
2 4 6 8 10 12 14 16 18 20 22 24 2 4 6 8 10 12 14 16 18 20 22 24

0.02 0.02
0.00 0.00
-0.02 -0.02
-0.04 -0.04
-0.06 -0.06 Figure 5.

-0.08
Impulse-response
-0.08
functions - Disag Ex24
-0.10 -0.10
and the CCR variables
2 4 6 8 10 12 14 16 18 20 22 24 2 4 6 8 10 12 14 16 18 20 22 24
Response to ∆CCR.S Response to ∆CCR.L

0.04 0.04
0.02 0.02
0.00 0.00
-0.02 -0.02
-0.04 -0.04
-0.06 -0.06
-0.08 -0.08
-0.10 -0.10
-0.12 -0.12
2 4 6 8 10 12 14 16 18 20 22 24 2 4 6 8 10 12 14 16 18 20 22 24

0.04 0.04
0.02 0.02
0.00
0.00
-0.02
-0.02
-0.04
-0.04
-0.06
-0.06 Figure 6.
-0.08
Impulse-response
-0.08
-0.10 functions - Disag Ex36
-0.10 and the CCR variables
-0.12
2 4 6 8 10 12 14 16 18 20 22 24 2 4 6 8 10 12 14 16 18 20 22 24
JES respectively. As one can see, the responses of Disag ExPC to one S.D. innovation on all CCR
variables are negative and significant. Hence, good (bad) sovereign credit news causes a reduction
(increase) in the general level of disagreement about exchange rate expectations. This result
confirms the findings previously presented in Tables 5 and 8 Moreover, the impact of sovereign
credit news innovations on this disagreement tends to last for 10 months approximately.
The responses of Disag Ex12, Disag Ex24 and Disag Ex36 to unexpected shocks in each
CCR variable are also negative and significant, which corroborates our previous findings.
The difference between them is that the response of Disag Ex12 becomes significant around
the second month onwards till the tenth month after the shock had been generated. On the
other hand, the response of Disag Ex24 and Disag Ex36 becomes significant roughly from the
moment that the shock had been generated. This difference can be explained if we consider
that, usually, sovereign credit news is not related with immediate default. Even the credit
watch status assumes that might be a change in the sovereign risk perception up to 6 months
ahead, whilst the outlook status indicates changes from 6 months to 2 years. Therefore, the
disagreement in expectations about the exchange for one year ahead might not immediately
incorporate the sovereign credit news.
5. Conclusion
CRAs are perceived as highly influential in the financial system since their announcements can
affect several players in the financial markets, from big private financial and non-financial
companies and their financial markets experts to sovereign states and their policymakers. CRAs’
assessments are usually viewed as a measure of country risk because they provide a forward-
looking default likelihood of sovereign bonds. In turn, the disclosure of credit information has a
crucial role in financial markets since it can affect international capital flows and the exchange
rate movements. In this sense, we investigate the impact of sovereign credit news, given by
rating changes and outlook/credit watch status of the main CRAs, on the disagreement in
expectations about the Brazilian exchange rate from December 2001 to March 2018. We provide
an extensive empirical evidence for the relationship between CRAs announcements and the
general level of disagreement in expectations about the exchange rate, as well as disagreement
measures of distinct forecasting horizons. Our results are robust to different econometric
techniques, different control variables and to distinct sovereign credit news variables.
Our findings suggest that bad (good) sovereign credit news is associated with higher (lower)
disagreements in expectations about the exchange rate. In other words, the deterioration
(improvement) of sovereign risk perception can increase (decrease) uncertainty among
residents of the affected country regarding the future value of the exchange rate. This effect is
valid not only for the common trend of disagreement but also for the disagreement in
expectations for 12 and 24 months ahead. Moreover, the dynamic analysis indicates the impact
of sovereign credit news on the disagreement in expectations for 24 months ahead is immediate
and holds for 10 months after the CRA announcement. On the other hand, the impact on the
disagreement in expectations for 12 months ahead is not instantaneous, but it persists from the
second month to the tenth month after the sovereign credit information has been released.
Our results have two important implications. First, they shed some light on how CRAs
assessments can amplify the boom-bust cycle. For example, during periods of economic crisis,
negative sovereign news, given by a rating downgrade or a negative credit/watch status, would
additionally enhance the recession through the increase of expectations uncertainty among the
residents of the affected country. This can be mainly true in those economic sectors that rely on
the future value of the exchange rate to run their business. Second, from a government point of
view, it is important to understand all the effects that CRAs announcements might have on the
economy. Since the disagreement in expectations about the exchange rate affects the
disagreement in expectations about inflation, inflation expectations might be poor anchored to
the inflation target when CRAs release bad sovereign news, which can harm the Central Bank Effects of
task of reaching inflation target in current and following years. Thereby, those countries that sovereign
rely on IT policy, such as Brazil, have one more reason to be committed with its sovereign credit
risk reputation. Besides reducing the chance of extending an economic recession, it might also
credit news by
facilitate the Central Bank task of anchoring inflation expectations. CRAs
Notes
1. Because the methodology behind CRAs’ assessment is not revealed explicitly, several studies have
investigated the main determinants of sovereign ratings (e.g. Cantor and Packer, 1996; Afonso, 2003;
Erdem and Varli, 2014; Montes et al., 2016b).
2. We use information from the main CRAs: Standard and Poor’s, Moody’s Investor Service and Fitch
Ratings.
3. Brazil is an important IT developing country.
4. We follow Montes et al. (2016a), Oliveira and Curi (2016), Montes and Luna (2018) and Montes and
Souza (2020) and use this measure of disagreement throughout the paper, since other measures
require the information related with the entire distribution of expectations, which is not provided by
the CBB. We are aware of other measures of disagreement, such as the inter-quartile range and
Kulback-Liebler divergence measure. However, these measures require the knowledge of the entire
distribution of individual forecasts. Alternative measures that are often used, such as the standard
deviation and the coefficient of variation need to be interpolated in order to be transformed in fixed
horizon, which is not appropriate for the analysis performed in this study (see, for instance, Oliveira
and Curi (2016)).
5. For instance, Brazil’s long-term foreign-currency rating was changed by Moody’s from B1 with
stable outlook to B1 with positive outlook on February 27 of 2002. The outlook was changed again to
stable on June 4 of 2002 and then to negative on June 20 of the same year. Therefore, we assigned the
value of 9/19 (short/long transformation) from the beginning of our sample period to January 2002,
the value of 9.25/20 (the sum of 9/19 for the B1 and þ0.25/þ1 for the positive outlook) from February
2002 to May 2002 and the value of 8.75/18 (the sum of 9/19 for the B1 and 0.25/-1 for the negative
outlook) from June 2002 onwards. We do this same procedure to each CRA rating series.
6. The evolution of Brazil’s average sovereign rating plus the credit signals after the short scale
transformation is basically the same.
7. Table A1 in the Appendix presents a detailed description of all control variables. Table A2 in the
Appendix presents the descriptive statistics of all variables.
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Corresponding author
Diego Silveira Pacheco De Oliveira can be contacted at: diegopat2003@hotmail.com
JES Appendix
Exchange rate (Ex_rate) This series is the average between two series: “Exchange rate (Free)
United States dollar (purchase) - end of period” (series number 3695 -
obtained from the CBB) and “Exchange rate (Free) United States dollar
(sale) - end of period” (series number 3696 - obtained from the CBB)
Exchange rate volatility This series is obtained following Capistran and Timmermann (2009),
(Vol_ex_rate) Ehrmann et al. (2012) and Montes and Luna (2018), which use GARCH
models to calculate volatility series used in estimates for the
disagreements in expectations. Thus, Vol_ex_rate is constructed using
the Ex_rate series in a GARCH (1,1) model (a variation of the ARCH
model). Thus, the GARCH model was used to obtain Vol_ex_rate, whose
mean equation is represented by Ex_ratet 5 C0 þ C1. Ex_ratet-1 þ ξt,
where, ξ is a random error term. Following Oliveira and Curi (2016),
one can expect that increases in exchange rate volatility lead to
uncertainties about the exchange rate in the future and thus increase
the disagreement in expectations about the exchange rate
Output gap (Gap) This series captures the economic activity. Real GDP is calculated using
cumulative 12-month GDP (series 4,382, obtained from the CBB) and
the general price index (obtained from the IPEADATA website). The
Gap is obtained by the Hamilton (2017) method. Oliveira and Curi (2016)
found a negative relationship between the output gap and the
disagreement in exchange rate expectations for the Brazilian case
Public debt as a proportion of GDP Following Montes and Luna (2018), the variable “Debt” is the series
(Debt) “Gross general government debt (% GDP)” (series 4,537, obtained from
the CBB). Once the public debt rises and threatens its sustainability,
uncertainties are generated regarding the future behavior of the
exchange rate; thus we expect a positive relationship between the
public debt and the disagreement in expectations about the exchange
rate
Budget balance as a proportion of This is the series “PBSR (%GDP) - Flows accumulated in 12 months -
GDP (Budget) Primary result - Total - Consolidated public sector - %” (series 5,793,
obtained from the CBB). It is expected that government efforts to keep
the budget balanced are able to reduce capital flight and thus reduce the
disagreement in expectations about the exchange rate
Inflation rate (Inflation) For this series, we use the “National consumer price index (IPCA) - in
12 months - %” (series 13522 obtained from the CBB)
Monetary policy interest rate Regarding this series we use the “Interest rate - Selic accumulated in the
(interest_rate) month in annual terms - % p.y” (series 4,189, obtained from the CBB)
US monetary policy interest rate We use the “Effective Federal Funds Rate, Percent, Monthly”, obtained
(Fed_funds_rate) from Fred, Economic Data, Federal Reserve Bank of St. Louis
Global financial crisis (Subprime) The global financial crisis is captured through a dummy variable. This
dummy variable assumes values equal to one from 2008M 04–2009M12
and zero otherwise. Since the subprime crisis created uncertainties in
the economy, following Oliveira and Curi (20176), we expect a positive
relationship between this dummy variable and the disagreement in
expectations about the exchange rate
“Lula effect” (Lula) This series captures the confidence crisis due to the 2002 presidential
election (“Lula effect”) - see Montes and Tiberto (2012) and Oliveira and
Curi (2016). The variable Lula assumes value equal to 1 in the period
from 2002M08–2003M03 and zero otherwise. It is possible to verify that
during this period there were strong exchange rate devaluations and
increased uncertainty in the expectations formation process about the
exchange rate, which generated an increase in the disagreement in
Table A1. expectations about the exchange rate. Oliveira and Curi (2016) found a
Description of the
control variables (continued )
positive and significant relationship between the Lula Effect and the Effects of
disagreement in exchange rate expectations sovereign
Brazilian political crisis (Pol_crisis) We use a dummy variable for the 2015 political crisis that led to the
impeachment of the president of the republic. This dummy variable
credit news by
assumes values equal to one from 2015M01–2016M12 and zero CRAs
otherwise
International reserves (Reserves) The series of international reserves is obtained from the CBB (series
3,546) “International reserves - Total - monthly - US$ (million)” Changes
in international reserves affect the government’s ability to honor its
commitments to international creditors and as a consequence, affect the
expectations formation process about the exchange rate
Global risk aversion (Vix) The Chicago Board Options Exchange Volatility Index (VIX) is a well-
known measure of future prospects regarding global risk. As it is the
implied volatility on actually negotiated options, it conveys the general
mood of the market concerning appetite for riskier assets, as high yield
bonds for instance. This variable is used as an instrument in GM M
estimates since it is able to affect exchange rate volatility and the
amount of international reserves Table A1.
JES
Table A2.
Descriptive statistics
Disag_12 Disag_24 Disag_36 Disag_PC Rating_lin_l Rating_lin_s Rating_log_l Rating_log_s Inflation
Mean 0.668 0.898 1.033 0.004 27.036 11.682 0.177 0.127 6.568
Median 0.559 0.777 0.886 0.559 28.333 12.083 0.079 0.198 6.150
Maximum 2.346 2.229 2.638 6.140 34.333 14.083 0.331 0.576 17.240
Minimum 0.279 0.389 0.422 2.083 16.333 8.167 0.963 0.528 2.460
Std. Dev 0.333 0.384 0.461 1.685 5.754 1.903 0.406 0.353 2.850
Obs 195 195 195 195 195 195 195 195 195
Vix Vol_ex_rate Interest_rate Gap Fed_funds_rate Debt Budget Reserves
Mean 0.194 0.012 13.307 3,040.476 1.352 66.123 1.224 228655.500

Median 0.147 0.006 12.390 3,872.496 0.595 64.140 1.970 241082.000
Maximum 1.000 0.126 26.320 15758.500 5.260 84.090 3.000 381843.000
Minimum 0.000 0.003 6.580 13436.690 0.070 57.030 3.060 32889.000
Std. Dev 0.165 0.016 4.421 5,110.161 1.642 6.898 1.696 137143.100
Obs 195 195 195 195 195 195 195 195
ADF PP KPSS
Variables Test Eq Lag t-stat 10% Eq Band t-stat 10% Eq Band t-stat 10%
Disag_12 Level 1st difference I 0 2.864 2.575 I 5 3.014 2.575 I 10 0.289 0.347
Disag_24 Level 1st difference I 2 2.582 2.575 I 4 2.581 2.575 I 10 0.322 0.347
Disag_36 Level N 0 1.116 1.616 I 4 2.747 2.575 I 10 0.311 0.347
1st difference I/T 0 11.792 3.140
Disag_PC Level 1st difference N 0 2.125 1.616 N 0 2.125 1.616 I 10 0.313 0.347
Rating_lin.l Level N 2 0.082 1.616 N 8 0.027 1.616 I 11 0.901 0.347
1st difference I/T 0 12.202 3.140 I/T 7 12.799 3.140 I 8 0.620 0.347
2nd difference I 193 0.500 0.347
Rating_lin.s Level N 0 0.193 1.616 N 8 0.051 1.616 I 11 0.927 0.347
Rating_log.l Level N 0 0.934 1.616 N 8 1.069 1.616 I 11 0.911 0.347
Rating_log.s Level N 0 0.734 1.616 N 8 0.941 1.616 I 11 0.926 0.347
Interest_rate Level I/T 1 3.670 3.140 N 9 1.286 1.616 I/T 11 0.269 0.119
1st difference N 3 4.544 1.616 I 9 0.045 0.347
Fed_funds_rate Level I/T 8 3.607 3.140 N 9 1.101 1.616 I/T 11 0.151 0.119
1st difference N 5 6.033 1.616 I 9 0.134 0.347
Vol_ex_rate Level 1st difference I/T 6 3.554 3.141 I/T 3 5.729 3.140 I 9 0.178 0.347
Inflation Level I 13 3.196 2.575 N 9 1.249 1.616 I 10 0.292 0.347
1st difference N 4 5.800 1.616
Gap Level N 8 2.222 1.616 I 3 4.358 2.575 I 10 0.441 0.347
1st difference I 19 0.092 0.347
Reserves Level I 3 0.956 2.575 I 9 0.855 2.575 I 11 1.643 0.347
1st difference I 2 4.336 2.575 I 8 9.529 2.575 I 9 0.249 0.347
Vix Level 1st difference I 0 3.875 2.575 I 0 3.876 2.575 I 10 0.274 0.347
Debt Level N 6 0.427 1.616 N 5 1.038 1.616 I 11 0.346 0.347
1st difference I/T 6 5.83 3.141 N 6 18.222 1.616
Budget Level N 0 0.763 1.616 N 5 0.838 1.616 I 11 1.159 0.347
1st difference I/T 0 13.147 3.140 I/T 3 13.142 3.140 I/T 3 0.059 0.119
Note(s): ADF - the final choice of lag was made based on Schwarz information criterion. PP and KPSS tests - Band is the bandwidth truncation chosen for the Bartlett
kernel. “I” denotes intercept; “I/T” denotes intercept and trend and; “N” denotes none
sovereign
credit news by
CRAs
Effects of
Unit root and
PP and KPSS)
Table A3.
stationarity tests (ADF,

JES Instrument specification used in the estimations of Table 4
Model 1 Disag_ex_12(2 to 8), Vol_ex_rate(2 to 6), Gap(2), ΔDebt(2 to 4), Vix(1 to 4),
Interest_rate(2 to 7), ΔFed_funds_rate(2 to 4), ΔReserves( 2 to 4), ΔInflation(2),
ACCR.S(2 to 7), ΔBudget(2 to 3)
Model 2 Disag_ex_ 12(2 to 8), Vol_ex_rate(2 to 6), Gap(2), ΔDebt(2 to 4), Vix(1 to 4),
ΔCCR.L(2 to 7), ΔBudget(2 to 3)
Inteiest_rate(2 to 7), ΔFed_funds_rate(2 to 4), ΔReserves( 2 to 4), ΔInflation(2),
ΔLCCR.S(2 to 7), ΔBudget(2 to 3)
Table A4. Model 4 Disag_ex_12(2 to 8), Vol_ex_rate(2 to 6), Gap(2), ΔDebt(2 to 4), Vix(1 to 4),
List of instruments Interest_rate(2 to 7), ΔFed_funds_rate(2 to 4), ΔReserves( 2 to 4), ΔInflation(2),
(Table 4) ΔLCCR.L(2 to 7), ΔBudget(2 to 3)
Instrument specification used in the estimations of Table 5
Model 1 Disag_ex_ 12(2 to 5), Vol_ex_rate(2 to 5), Gap(2 to 7), ΔDebt(2 to 3), Vix(1 to 2),
ΔInterest_rate(2), ΔFed_funds_rate(2 to 3), ΔReserves( 2 to 3), ΔInflation(2 to 4),
ΔCCR.S(2 to 10), ΔBudget(2 to 6)
Model 2 Disag_ex_12(2 to 5), Vol_ex_rate(2 to 6), Gap(2 to 6), ΔDebt(2 to 3), Vix(1 to 2),
AInterest_rate(2), ΔFed_funds_rate(2 to 3), ΔReserves( 2 to 3), ΔInflation(2 to 4),
Table A5. Model 4 Disag_ex_ 12(2 to 6), Vol_ex_rate(2 to 7), Gap(2 to 6), ΔDebt(2 to 3), Vix(1 to 2),
List of instruments ΔInterest_rate(2), ΔFed_funds_rate(2 to 3), ΔReserves( 2 to 3), ΔInflation(2 to 4),
ΔInterest_iate(2), ΔFed_funds_rate(2 to 3), ΔReserves( 2 to 3), ΔInflation(2 to 4),
ΔInterest_iate(2), ΔFed_funds_rate(2 to 3), ΔReserves( 2 to 3), ΔInflation(2 to 4),
Table A6. Model 4 Disag_ex_l 2(2 to 5), Vol_ex_rate(2 to 6), Gap(2 to 6), ΔDebt(2 to 3), Vix(1 to 2),
List of instruments ΔInterest_rate(2), ΔFed_funds_rate(2 to 3), ΔReserves( 2 to 3), ΔInflation(2 to 4),
(Table 6) ΔCCR.L(2 to 10), ΔBudget(2 to 6)
Effects of
sovereign
Model 1 Disag_ex_12(2 to 8), Vol_ex_rate(2 to 4), Gap(2 to 3), ΔDebt(2 to 4), Vix(1 to 5), credit news by
Interest rate(2 to 8), ΔFed_funds_rate(2 to 3),ΔReseives(2 to 4), ΔInflation(2 to 4),
ΔCCR.S(2 to 7), ΔBudget(2 to 4) CRAs
Interest_rate(2 to 8), ΔFed_funds_rate(2 to 3),ΔReseivesC2 to 4), ΔInflation(2 to 4),
Interest_rate(2 to 8), ΔFed_funds_rate(2 to 3), ΔReserves(2 to 4), ΔInflation(2 to 4),
Model 4 Disag_ex_12(2 to 8), Vol_ex_rate(2 to 4), Gap(2 to 3), ΔDebt(2 to 4), VixC1 to 5), Table A7.
Interest_rate(2 to 8), ΔFed_funds_rate(2 to 3), ΔReserves(2 to 4), ΔInflation(2 to 4), List of instruments
ΔLCCR.L(2 to 7), ΔBudget(2 to 4) (Table 7)
Interest_rate(2 to 7), ΔFed_fiuids_rate(2 to 4), ΔReserves( 2 to 4), ΔInflation(2),
Model 4 Disag_ex_l 2(2 to 8), Vol_ex_rate(2 to 6), Gap(2), ΔDebt(2 to 4), Vix(1 to 4). Table A8.
Interest_rate(2 to 7), ΔFed_funds_rate(2 to 4), ΔReserves( 2 to 4), ΔInflation(2). List of instruments
ΔCCR.L(2 to 7), ΔBudget(2 to 3) (Table 8)
Model 1 Gap(2 to 3), ΔDebtC2 to 6), Vix(1 to 7), Δlnterest_rate(2), ΔFed_funds_rate(2 to 4),
ΔReserves(2 to 4), ΔInflation(2 to 7), ΔCCR.S( 2 to 10), ΔBudget(2)
Model 2 Gap(2 to 6), ADebt(2 to 4), Vix(1 to 7), Δlnterest_rate(2), ΔFed_funds_rate(2 to 4),
ΔReserves(2 to 4), ΔInflation(2 to 7), ΔCCR.L( 2 to 10), ΔBudget(2 to 3)
Model 3 Gap(2 to 4), ΔDebt(2 to 6), Vix(1 to 7), Δlnterest_rate(2), ΔFed_f\inds_rate(2 to 4),
ΔReserves(2 to 4), ΔInflation(2 to 7), ΔLCCR.L(2 to 10), ΔBudget(2) Table A9.
Model 4 Gap(2 to 6), ΔDebt(2 to 4), Vix(1 to 7), Δlnterest_rate(2), ΔFed_funds_iate(2 to 4), List of instruments
ΔReserves(2 to 4), ΔInflation(2 to 7), ΔCCR.L( 2 to 10), ΔBudget(2 to 3) (Table 9)
JES
ΔInterest_rate(2), ΔFed_funds_rate(2 to 3), ΔReserves(2 to 3), ΔInflation(2 to 4),
ΔLCCR.L(2 to 10), ΔBudget(2 to 6)
Table A10. Model 4 Disag_ex_ 12(2 to 4), Vol_ex_rate(2 to 7), Gap(2 to 6), ADebt(2 to 3), Vix(1 to 3),
List of instruments ΔInterest_rate(2), ΔFed_funds_rate(2 to 3), ΔReserves(2 to 3), ΔInflation(2 to 4),
Model 1 Disag_ex_l 2(2 to 8), Vol_ex_rate(2 to 4), Gap(2 to 3), ΔDebt(2 to 4), Vix(1 to 5),
Model 2 Disag_ex_l 2(2 to 8), Vol_ex_rate(2 to 4), Gap(2 to 3), ΔDebt(2 to 4), Vix(1 to 5),
Model 3 Disag_ex_l 2(2 to 7), Vol_ex_rate(2 to 4), Gap(2 to 3), ADebt(2 to 4), Vix(1 to 5),
Table A11. Model 4 Disag_ex_l 2(2 to 8), Vol_ex_rate(2 to 4), Gap(2 to 3), ADebt(2 to 4), Vix(1 to 5),
List of instruments Intelest_rate(2 to 8), ΔFed_funds_rate(2 to 3), ΔReserves(2 to 4), ΔInflation(2 to 4),
ΔCCR.S ΔCCR.L ΔLCCR.S ΔLCCR.L

With c Without c With c Without c With c Without c With c Without c
Lag HQ HQ HQ HQ HQ HQ HQ HQ
0 23.84 25.79 26.04 27.99 20.52 22.47 20.76 22.71

1 18.19 18.25 20.40 20.45 14.87 14.93 15.12 15.17
2 1 8.01* 18.17 20.20* 20.36 14.70* 14.86 14.93* 15.08
3 18.28 18.36 20.47 20.55 14.97 15.05 15.20 15.28
4 18.50 18.58 20.71 20.79 15.20 15.29 15.44 15.52
5 18.79 18.84 21.01 21.06 15.53 15.58 15.74 15.79
Table A12.
Selection of VAR lag 6 19.27 19.29 21.48 21.50 16.00 16.02 16.22 16.23
order 7 19.72 19.77 21.92 21.98 16.43 16.48 16.66 16.71
(dependent: 8 20.15 20.20 22.37 22.41 16.88 16.93 17.09 17.14
Disag ExPC ) Note(s): * indicates lag order selected by the criterion
Effects of
ΔCCR.S ΔCCR.L ΔLCCR.S ΔLCCR.L
With c Without c With c Without c With c Without c With c Without c sovereign
Lag HQ HQ HQ HQ HQ HQ HQ HQ credit news by
0 20.49 23.10 22.68 25.29 17.16 19.77 17.40 20.01
CRAs
1 15.57 15.61 17.76 17.81 12.25 12.29 12.49 12.53
2 15.39* 15.45 17.58* 17.64 12.07* 12.14 12.30* 12.37
3 15.62 15.75 17.83 17.95 12.31 12.44 12.57 12.69
4 15.90 16.05 18.12 18.28 12.59 12.74 12.86 13.01
5 16.23 16.33 18.45 18.56 12.94 13.05 13.19 13.29
Table A13.
6 16.68 16.76 18.89 18.97 13.38 13.46 13.62 13.70 Selection of VAR lag
7 17.16 17.25 19.36 19.45 13.85 13.94 14.09 14.18 order
8 17.70 17.78 19.90 19.99 14.41 14.50 14.63 14.72 (dependent:
Note(s): * indicates lag order selected by the criterion Disag Ex12)
ΔCCR. S ΔCCR.L ΔLCCR.S ΔLCCR.L

0 20.95 23.73 23.14 25.92 17.62 20.40 17.86 20.65

1 15.52 15.56 17.72 17.76 12.20 12.24 12.44 12.48
2 15.48* 15.53 17.68* 17.72 12.18* 12.22 12.40* 12.44
3 15.71 15.79 17.91 17.98 12.41 12.49 12.64 12.71
4 15.96 16.10 18.18 18.31 12.67 12.81 12.91 13.04
5 16.25 16.38 18.47 18.60 12.99 13.13 13.20 13.34
Table A14.
7 17.13 17.26 19.35 19.48 13.83 13.96 14.08 14.21 order
8 17.55 17.71 19.77 19.94 14.27 14.43 14.50 14.66 (dependent:
ΔCCR. S ΔCCR.L ΔLCCR.S ΔLCCR.L

0 21.40 24.16 23.60 26.36 18.08 20.84 18.32 21.08

1 15.84 15.90 18.06 18.10 12.52 12.57 12.78 12.83
2 15.82* 15.88 18.03* 18.08 12.51* 12.57 12.76* 12.81
3 16.12 16.15 18.32 18.35 12.81 12.84 13.05 13.08
4 16.36 16.44 18.56 18.64 13.06 13.13 13.29 13.37
5 16.65 16.74 18.87 18.96 13.38 13.47 13.60 13.68
Table A15.
7 17.49 17.61 19.70 19.82 14.20 14.31 14.43 14.55 order
8 18.03 18.15 20.25 20.37 14.76 14.88 14.98 15.09 (dependent:
JES _ and ΔCCR.S _ and ΔCCR.L
Inverse Roots of AR Characteristic Polynomial Inverse Roots of AR Characteristic Polynomial
1.5 1.5
1.0 1.0
0.5 0.5
0.0 0.0
-0.5 -0.5
-1.0 -1.0
-1.5 -1.5
-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5
_ and ΔLCCR.S _ and ΔLCCR.L

1.5 1.5
1.0 1.0
0.5 0.5
Figure A1. 0.0 0.0
VAR stability
-0.5 -0.5
(Disag ExPC and the
sovereign credit news -1.0 -1.0
variables) -1.5 -1.5
-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5
_ 12 and ΔCCR.S _ 12 and ΔCCR.L

1.5 1.5
1.0 1.0
0.5 0.5
0.0 0.0
-0.5 -0.5
-1.0 -1.0
-1.5 -1.5
-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5
12 12
_ and ΔLCCR.S _ and ΔLCCR.L
1.5 1.5
1.0 1.0
0.5 0.5
Figure A2. 0.0 0.0
VAR stability
-0.5
(Disag Ex12 and the -0.5
sovereign credit news -1.0 -1.0

variables) -1.5 -1.5
-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5
24 24 Effects of
_ and ΔCCR.S _ and ΔCCR.L
1.5
Inverse Roots of AR Characteristic Polynomial
1.5
Inverse Roots of AR Characteristic Polynomial
sovereign
1.0 1.0
credit news by
0.5 0.5
CRAs
0.0 0.0
-0.5 -0.5
-1.0 -1.0
-1.5 -1.5
-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5
_ 24 and ΔLCCR.S _ 24 and ΔLCCR.L

1.5 1.5
1.0 1.0
0.5 0.5
0.0 0.0
Figure A3.
-0.5 -0.5 VAR stability
(Disag Ex24 and the
-1.0 -1.0
sovereign credit news
-1.5 -1.5
variables)
-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5
_ 36 and ΔCCR.S _ 36 and ΔCCR.L

1.5 1.5
1.0 1.0
0.5 0.5
0.0 0.0
-0.5 -0.5
-1.0 -1.0
-1.5 -1.5
-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5
_ 36 and ΔLCCR.S _ 36 and ΔLCCR.L

1.5 1.5
1.0 1.0
0.5 0.5
0.0 0.0 Figure A4.

-0.5 -0.5 VAR stability
(Disag Ex36 and the
-1.0 -1.0 sovereign credit news
-1.5 -1.5
variables)
-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5

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The current issue and full text archive of this journal is available on Emerald Insight at:

Sovereign credit news and Effects of

2. Data and methodology

22 58 Investment Extremely strong capacity to meet financial AAA Aaa AAA

CCR.L 0.40 0.39 0.41 0.36

negative (positive) outlook/credit watch status, are followed by an increase (decrease) in

expectations about the

Variables of C 0.926*** 0.930*** 0.925*** 0.932*** 1.824*** 1.790*** 1.985*** 1.819***

(0.317) (0.321) (0.320) (0.322) (0.411) (0.416) (0.460) (0.420)

Variables of C 0.546*** 0.546*** 0.547*** 0.546*** 0.454*** 0.433*** 0.443*** 0.419***

(0.055) (0.055) (0.055) (0.055) (0.149) (0.142) (0.140) (0.137)

Variables C 0.707*** 0.706*** 0.707*** 0.706*** 0.695*** 0.695*** 0.700*** 0.689***

(0.080) (0.081) (0.080) (0.081) (0.123) (0.121) (0.123) (0.122)

Variables of C 0.698*** 0.697*** 0.698*** 0.696*** 0.437*** 0.442*** 0.420*** 0.440***

(0.096) (0.097) (0.097) (0.097) (0.147) (0.150) (0.148) (0.150)

Variables of interest C 0.213* 0.178* 0.137 0.180**

Variables of C 0.228*** 0.233*** 0.290*** 0.227***

4. Dynamic analyses through vector autoregressive

Response to ∆LCCR.S Response to ∆LCCR.L

Response to ∆CCR.S Response to ∆CCR.L

Response to ∆LCCR.S Response to ∆LCCR.L

Response to ∆LCCR.S Response to ∆LCCR.L

-0.06 -0.06 Figure 5.

Response to ∆CCR.S Response to ∆CCR.L

Response to ∆LCCR.S Response to ∆LCCR.L

Vix Vol_ex_rate Interest_rate Gap Fed_funds_rate Debt Budget Reserves

Mean 0.194 0.012 13.307 3,040.476 1.352 66.123 1.224 228655.500

Unit root and

stationarity tests (ADF,

Instrument specification used in the estimations of Table 5

Instrument specification used in the estimations of Table 6

Instrument specification used in the estimations of Table 8

Instrument specification used in the estimations of Table 9

Instrument specification used in the estimations of Table 11

ΔCCR.S ΔCCR.L ΔLCCR.S ΔLCCR.L

0 23.84 25.79 26.04 27.99 20.52 22.47 20.76 22.71

ΔCCR. S ΔCCR.L ΔLCCR.S ΔLCCR.L

0 20.95 23.73 23.14 25.92 17.62 20.40 17.86 20.65

ΔCCR. S ΔCCR.L ΔLCCR.S ΔLCCR.L

0 21.40 24.16 23.60 26.36 18.08 20.84 18.32 21.08

_ and ΔLCCR.S _ and ΔLCCR.L

_ 12 and ΔCCR.S _ 12 and ΔCCR.L

sovereign credit news -1.0 -1.0

_ 24 and ΔLCCR.S _ 24 and ΔLCCR.L

_ 36 and ΔCCR.S _ 36 and ΔCCR.L

_ 36 and ΔLCCR.S _ 36 and ΔLCCR.L

0.0 0.0 Figure A4.

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Variables of C 0.926* 0.930* 0.925* 0.932* 1.824* 1.790* 1.985* 1.819*

Variables of C 0.546* 0.546* 0.547* 0.546* 0.454* 0.433* 0.443* 0.419*

Variables C 0.707* 0.706* 0.707* 0.706* 0.695* 0.695* 0.700* 0.689*

Variables of C 0.698* 0.697* 0.698* 0.696* 0.437* 0.442* 0.420* 0.440*

Variables of C 0.228* 0.233* 0.290* 0.227*