Sovereign Debt Ratings and Stock Liquidity Around the World
Published: Journal of Banking & Finance 73, 99-112, 2016
49 Pages Posted: 2 Dec 2013 Last revised: 10 Feb 2017
Date Written: August 8, 2016
This paper studies the impact of sovereign debt rating changes on liquidity for stocks from 40 countries for the period 1990-2009. We find that sovereign rating changes significantly affect stock liquidity. The impact is stronger for downgrades than for upgrades, and is nonlinear in event size. The loss of investment grade has a particularly strong negative impact on stock liquidity. We also find that some stock characteristics and country legal and macroeconomic environment are important in explaining the differences in the impact of sovereign credit rating changes on stock liquidity across countries.
Keywords: sovereign bond; credit rating; liquidity; emerging market; developed market; international financial market
JEL Classification: G14, G15
Suggested Citation: Suggested Citation