Emerging Markets Instability : Do Sovereign Ratings Affect Country Risk and Stock Returns?

Emerging Markets Instability : Do Sovereign Ratings Affect Country Risk and Stock Returns?

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Financial market instability has been the focus of attention of both academic and policy circles. Rating agencies have been under particular scrutiny lately as promoters of financial excesses, upgrading countries in good times and downgrading them in bad times. Using a panel of emerging economies, this paper examines whether sovereign ratings affect financial markets. The authors find that changes in sovereign ratings have an impact on country risk and stock returns. They also find that these changes are transmitted across countries, with neighbor-country effects being more significant. Rating upgrades (downgrades) tend to occur following market rallies (downturns). Countries with more vulnerable economies, as measured by low ratings, are more sensitive to changes in U.S. interest rates.

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Bibliographic Details
Main Authors: Kaminsky, Graciela, Schmukler, Sergio L.
Language:English
en_US
Published: World Bank, Washington, DC 2001-09
Subjects:ACCOUNTING STANDARDS, ASYMMETRIC INFORMATION, BENCHMARK, BONDS, CAPITAL FLOWS, CAPITAL MARKETS, COMMERCIAL BANKS, CONTAGION, CREDIT RATINGS, DEBT, DEFAULT RISK, DEVALUATION, DEVELOPED COUNTRIES, DOMESTIC STOCK MARKETS, ECONOMETRICS, ECONOMIC GROWTH, ECONOMICS, EMERGING MARKETS, EXCHANGE RATE, FEDERAL RESERVE BANK OF NEW YORK, FINANCIAL CRISES, FINANCIAL MARKETS, FOREIGN EXCHANGE, GLOBALIZATION, INTEREST RATE, INTEREST RATES, INTERNATIONAL BANKS, LEADING INDICATORS, LIQUIDITY, MARKET LIBERALIZATION, MARKET PRICES, MARKET RISK, MONETARY POLICY, MORAL HAZARD, MUTUAL FUND, MUTUAL FUNDS, PRICE INDEXES, PROBABILITY OF DEFAULT, RATING AGENCIES, RESERVES, SECURITIES, SECURITIES MARKETS, SOVEREIGN RISK, STOCK MARKETS, STOCK PRICES, TRANSPARENCY,
Online Access:http://documents.worldbank.org/curated/en/2001/09/2874364/emerging-markets-instability-sovereign-ratings-affect-country-risk-stock-returns
https://hdl.handle.net/10986/19550
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Summary:Financial market instability has been the focus of attention of both academic and policy circles. Rating agencies have been under particular scrutiny lately as promoters of financial excesses, upgrading countries in good times and downgrading them in bad times. Using a panel of emerging economies, this paper examines whether sovereign ratings affect financial markets. The authors find that changes in sovereign ratings have an impact on country risk and stock returns. They also find that these changes are transmitted across countries, with neighbor-country effects being more significant. Rating upgrades (downgrades) tend to occur following market rallies (downturns). Countries with more vulnerable economies, as measured by low ratings, are more sensitive to changes in U.S. interest rates.

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