The increasing dependence on credit by individuals, corporates and governments has made evaluation of their creditworthiness imperative, and has led to the establishment of credit agencies and credit bureaus. The ratings provided by these agencies measure the ability to meet debt obligations effectively and in time, but have been a matter of debate due to the possibility of being affected by subjective opinions rather than objective analysis. The first paper, “Are Sovereign Credit Ratings Objective and Transparent?”, by Shreekant Iyengar, addresses the issue of reliability of these ratings by comparing the sovereign credit ratings of commonly rated countries for the years 1995 and 2007, assigned by two major rating agencies—Moody’s and Standard and Poor’s. Using regression analysis, the author reports the significant differences in the ratings and attributes the differences to the subjectivity in the assessment, as the weights of the commonly used indicators are not found to vary significantly for the two agencies.

Whether the development of financial institution pushes economic growth or it is itself a result of increasing economic activities has been a matter of widespread discussion among researchers. The next paper, “Bounds Testing Approaches to the Analysis of Finance-Growth Nexus in the Philippines”, by M Shabri Abd. Majid and Hafasnudin, attempts to respond to this in the context of the Philippines, based on quarterly data of post-1997 financial crisis period. The authors test the existence of relationship between financial development and economic growth and its direction in the Philippine economy by employing a battery of time series techniques. They document that financial development in the Philippines follows economic growth.

Moving on, the third paper, “Empirical Evidence on Capital Mobility in Four ASEAN Countries”, by Goh Soo Khoon and Kong Seow Shin, examines the degree of international capital mobility in Malaysia, Singapore, Thailand and the Philippines, and highlights important issues in the age of globalization, when emerging economies witness dramatic inflows and outflows and need proper mechanism to manage the flow. By utilizing the most recent measure of international capital mobility, which focuses on the correlation between consumption and net output, the authors point out misspecification in the model, as it rejects the hypothesis of perfect capital mobility for Singapore and the Philippines against expectations. The result comes as a surprise as Singapore was the first Asian country to begin liberalization, and all these four countries have taken major steps in deregulating their financial markets and have very limited barriers to capital flows. Thus, these interesting results offer further scope of research.

The interlinkage of spot and derivatives markets has been studied by an impressive range of researchers. In the last paper, “Informational Role of Options Open Interests and Volume in Forecasting Future Prices: A Study on Indian Market”, Rajesh Pathak and Nikhil Rastogi, attempt to study the informational role of options market activity in predicting the future stock prices, in the Indian context. The results show that options market data are informative and options open interest and volume are good and consistent predictors of prices at maturity, and can help in maximizing the gains or minimizing the losses.

-- Vishwanathan Iyer
Consulting Editor