The Effect of Sovereign Credit Rating Announcements on Emerging Bond and Stock Markets: New Evidences

Miroslav Mateev


This paper examines the impact of sovereign credit rating changes on emerging market economies. The motivation behind previous research in this area has been to evaluate the relevance of bond ratings for efficiency of financial markets; in particular, do rating agencies have superior information and/or analytical skills and hence can their announcements influence excess bond and equity returns? Reisen, & von Maltzan (1999), among others, argue that the sovereign ratings might be able to trigger pronounced boom-bust cycles in emerging market lending. The goal of this research is to evaluate the relevance of credit rating agencies for efficiency of financial markets in transition economies; in particular, do changes in sovereign ratings convey valuable information only to local market participants, or do they trigger contagious fluctuations in other markets, thus attributing to their financial instability. For that reason we study country-specific (or domestic) and cross-country (or foreign) spillover effects of rating changes. To capture the dynamic effects around the time of changes in ratings, we use the technique of event studies. We do find evidence that rating changes of sovereign bonds in one country trigger significant changes in yield spreads and stock market returns in other (neighboring) countries (the so-called cross-country contagion effect). In line with previous research the spillover effects of rating changes (downgrades in our case) are found to be stronger at the regional level.

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