The National Market Impact of Sovereign Rating Changes

University of Strathclyde, Department of Accounting & Finance Working Paper

30 Pages Posted: 5 Mar 2002

See all articles by Robert W. Faff

Robert W. Faff

University of Queensland

Robert D. Brooks

Monash University; Financial Research Network (FIRN)

Joe Hillier

Glasgow Caledonian University

David Hillier

University of Strathclyde - Department of Accounting and Finance

Date Written: November 2001

Abstract

This study investigates the aggregate stock market impact of local currency and foreign currency sovereign rating changes. Consistent with evidence pertaining to company credit rating changes, we report that only rating downgrades have a wealth impact on market returns. Decreases in local currency ratings appear to impart no information to the market whereas foreign currency rating downgrades are associated with significant wealth effects. Interestingly, of the four credit rating agencies examined, only Standard & Poors and Fitch rating downgrades result in significant market falls. These results are robust to differences in the currency denomination or interval of returns. Finally, we can find no evidence that emerging markets are particularly sensitive to rating changes or that markets react more severely to multiple rating changes. These findings should be of great interest to all investor groups (including managed investment funds) since there are important implications here regarding international asset allocation.

Keywords: Sovereign Rating Changes, Event Study, Country Beta Risk

JEL Classification: G15

Suggested Citation

Faff, Robert W. and Brooks, Robert Darren and Hillier, Joe and Hillier, David, The National Market Impact of Sovereign Rating Changes (November 2001). University of Strathclyde, Department of Accounting & Finance Working Paper. Available at SSRN: https://ssrn.com/abstract=302674 or http://dx.doi.org/10.2139/ssrn.302674

Robert W. Faff

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Robert Darren Brooks

Monash University ( email )

Wellington Road
Clayton, Victoria 3168
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Joe Hillier

Glasgow Caledonian University ( email )

City Campus
Cowcaddens Road
Glasgow G4 0BA, Scotland
United Kingdom

David Hillier (Contact Author)

University of Strathclyde - Department of Accounting and Finance ( email )

Curran Building
100 Cathedral Street
Glasgow G4 0LN
United Kingdom
44 0141 330 4809 (Phone)
44 0141 330 4442 (Fax)

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