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

40 Pages Posted: 25 Jan 2002

See all articles by Graciela Kaminsky

Graciela Kaminsky

National Bureau of Economic Research (NBER); George Washington University - Department of Economics

Sergio L. Schmukler

World Bank - Development Research Group (DECRG)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2002

Abstract

Changes in sovereign ratings affect country risk and stock returns. And these changes are transmitted across countries, with neighbor-country effects being more significant.

Financial market instability has received attention from 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. Using a panel of emerging economies, Kaminsky and Schmukler examine whether sovereign ratings affect financial markets.

The authors find that changes in sovereign ratings affect country risk and stock returns. They also find that these changes are transmitted across countries, with neighbor-country effects being more significant. Rating upgrades tend to follow market rallies; downgrades tend to follow market downturns. Countries with more vulnerable economies, as measured by low ratings, are more sensitive to changes in U.S. interest rates.

This paper - a product of Macroeconomics and Growth, Development Research Group - is part of a larger effort in the group to understand how financial markets work in developing countries. The authors may be contacted at graciela@gwu.edu or sschmukler@worldbank.org.

JEL Classification: F30, G12, G14, G15, G29

Suggested Citation

Kaminsky, Graciela and Schmukler, Sergio, Emerging Markets Instability: Do Sovereign Ratings Affect Country Risk and Stock Returns? (January 2002). World Bank Policy Research Working Paper No. 2678. Available at SSRN: https://ssrn.com/abstract=297504

Graciela Kaminsky

National Bureau of Economic Research (NBER)

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George Washington University - Department of Economics ( email )

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HOME PAGE: http://www.gracielakaminsky.com/

Sergio Schmukler (Contact Author)

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN MC 3-301
Washington, DC 20433
United States
202-458-4167 (Phone)
202-522-3518 (Fax)

HOME PAGE: http://www.worldbank.org/en/about/people/s/sergio-schmukler

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