Emerging markets instability: do sovereign ratings affect country risk and stock returns?
AbstractFinancial market instability has been the focus of attention of 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 times. Using a panel of emerging economies, this paper examines whether sovereign ratings affect financial markets. The authors find that changes in sovereign ratings have an impact on country risk and stock returns. They also find that these changes are transmitted across countries, with neighbor-country effects being more significant. Rating upgrades (downgrades) tend to occur following market rallies (downturns). Countries with more vulnerable economies, as measured by low ratings, are more sensitive to changes in U.S. interestrates.
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Bibliographic InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 2678.
Date of creation: 30 Sep 2001
Date of revision:
Environmental Economics&Policies; Payment Systems&Infrastructure; Banks&Banking Reform; Economic Theory&Research; Financial Intermediation; Environmental Economics&Policies; Banks&Banking Reform; Economic Theory&Research; Financial Intermediation; Insurance&Risk Mitigation;
Other versions of this item:
- Graciela Kaminsky & Sergio L. Schmukler, 2002. "Emerging Market Instability: Do Sovereign Ratings Affect Country Risk and Stock Returns?," World Bank Economic Review, World Bank Group, vol. 16(2), pages 171-195, August.
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