Emerging Market Instability: Do Sovereign Ratings Affect Country Risk and Stock Returns?
Posted: 21 Jan 2003 Last revised: 15 Jul 2011
Date Written: July 15, 2011
Changes in sovereign debt ratings and outlooks affect financial markets in emerging economies. They affect not only the instrument being rated (bonds) but also stocks. They directly impact the markets of the countries rated and generate cross-country contagion. The effects of rating and outlook changes are stronger during crises, in nontransparent economies, and in neighboring countries. Upgrades tend to take place during market rallies, whereas downgrades occur during downturns, providing support to the idea that credit rating agencies contribute to the instability in emerging financial markets.
Keywords: credit ratings, credit outlook, emerging markets, country risk, bonds spread, stock returns, financial markets, spillover effects, contagion
JEL Classification: F30, G12, G14, G15, G29
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