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Communication of Credit Rating Agencies and Financial Markets

Author

Listed:
  • Lorenzo Menna

    (Banco de México)

  • Martín Tobal

    (Banco de México)

Abstract

The ability of credit rating agencies (CRAs) to influence financial markets has been widely debated in the academic literature, policy circles and general press. While some commentators think that CRAs’ announcements have relevant effects on the markets, others reckon that they may simply follow investor opinion. To address the issue, the empirical literature has mainly employed the event study methodology, analyzing the behavior of financial markets around rating change announcements. Following a recent trend that has emphasized the use of high-frequency data to achieve credible identification in macroeconomics, in this paper, we use the instrumental variable-local projection (IV-LP) methodology to obtain the effect of structural shocks to CRAs’ communication on financial markets. Applying this approach to Mexico, we find that CRAs’ communication about the sovereign has statistically significant effects on CDS spreads, interest rates and the exchange rate.

Suggested Citation

  • Lorenzo Menna & Martín Tobal, 2021. "Communication of Credit Rating Agencies and Financial Markets," Working Papers 80, Red Nacional de Investigadores en Economía (RedNIE).
    • Handle: RePEc:aoz:wpaper:80
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    File URL: https://rednie.eco.unc.edu.ar/files/DT/80.pdf
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    More about this item

    Keywords

    credit rating agencies; financial markets; instrumental variable;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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