Sovereign Rating Changes - Do They Provide New Information for Stock Markets?

41 Pages Posted: 27 Sep 2005 Last revised: 23 Jun 2008

See all articles by Vincent J. Hooper

Vincent J. Hooper

Xiamen University

Tim P. Hume

UNSW Australia Business School, School of Banking and Finance

Suk-Joong Kim

The University of Sydney Business School

Date Written: 2008

Abstract

The purpose of this paper is to examine the impact of sovereign rating changes on international financial markets using a comprehensive database of 42 countries, covering the major regions in the world over the period 1995-2003. In general, we find that rating agencies provide stock and foreign exchange markets with new tradable information. Specifically, rating upgrades (downgrades) significantly increased (decreased) USD denominated stock market returns and decreased (increased) volatility. Whereas the mean response is contributed evenly by the local currency stock returns and exchange rate changes that make up the USD returns, only the foreign exchange volatility was behind the USD denominated return volatility. In addition, we find significant asymmetric effects of rating announcements. The market responses - both return and volatility - are more pronounced in the cases of downgrades, foreign currency debt, emerging market debt, and during crisis periods. This study has important policy implications for international investors' asset allocation plans and for regulatory bodies such as the Basel Committee who increasingly rely upon Moody's, Standard and Poor's and Fitch's ratings for their regulatory regimes.

Keywords: Sovereign ratings, ratings outlook, country risk, stock markets

JEL Classification: F21, F34, G14, G15

Suggested Citation

Hooper, Vincent James and Hume, Tim P. and Kim, Suk-Joong, Sovereign Rating Changes - Do They Provide New Information for Stock Markets? (2008). Economic Systems, Vol. 32/2, pp. 142-166, 2008. Available at SSRN: https://ssrn.com/abstract=685661

Vincent James Hooper

Xiamen University ( email )

Tim P. Hume

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

Suk-Joong Kim (Contact Author)

The University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia
+61 2 9114 0940 (Phone)
+61 2 9351 6461 (Fax)

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