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Sovereign rating changes--Do they provide new information for stock markets?

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  • Hooper, Vince
  • Hume, Timothy
  • Kim, Suk-Joong

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.

Suggested Citation

  • Hooper, Vince & Hume, Timothy & Kim, Suk-Joong, 2008. "Sovereign rating changes--Do they provide new information for stock markets?," Economic Systems, Elsevier, vol. 32(2), pages 142-166, June.
  • Handle: RePEc:eee:ecosys:v:32:y:2008:i:2:p:142-166
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    Cited by:

    1. Bruno Ferreira Frascaroli & Luciano da Costa Silva & Osvaldo Cândido da Silva Filho, 2009. "Ratings of Sovereign Risk and the Macroeconomics Fundamentals of the countries: a Study Using Artificial Neural Networks," Brazilian Review of Finance, Brazilian Society of Finance, vol. 7(1), pages 73-106.
    2. Asgharian, Hossein & Hess, Wolfgang & Liu, Lu, 2013. "A spatial analysis of international stock market linkages," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 4738-4754.
    3. repec:eaa:aeinde:v:17:y:2017:i:1_1 is not listed on IDEAS
    4. Baum, Christopher F. & Schäfer, Dorothea & Stephan, Andreas, 2016. "Credit rating agency downgrades and the Eurozone sovereign debt crises," Journal of Financial Stability, Elsevier, pages 117-131.
    5. Patrycja Chodnicka-Jaworska, 2016. "Makroekonomiczne czynniki dotyczące not, nastawienia oraz trendów ratingów kredytowych krajów strefy euro," Collegium of Economic Analysis Annals, Warsaw School of Economics, Collegium of Economic Analysis, issue 41, pages 109-126.
    6. Böninghausen, Benjamin & Zabel, Michael, 2013. "Credit Ratings and Cross-Border Bond Market Spillovers," Discussion Papers in Economics 21075, University of Munich, Department of Economics.
    7. Afonso, António & Gomes, Pedro & Taamouti, Abderrahim, 2014. "Sovereign credit ratings, market volatility, and financial gains," Computational Statistics & Data Analysis, Elsevier, pages 20-33.
    8. Böninghausen, Benjamin & Zabel, Michael, 2015. "Credit ratings and cross-border bond market spillovers," Working Paper Series 1831, European Central Bank.
    9. Alsakka, Rasha & ap Gwilym, Owain, 2012. "Foreign exchange market reactions to sovereign credit news," Journal of International Money and Finance, Elsevier, vol. 31(4), pages 845-864.
    10. María Concepción Verona Martel & José Juan Déniz Mayor, 2011. "Las agencias de rating y la crisis fi nanciera de 2008: ¿El fi n de un poder sin control?," REVISTA CRITERIO LIBRE, UNIVERSIDAD LIBRE - SEDE PRINCIPAL, June.
    11. Sensoy, Ahmet & Eraslan, Veysel & Erturk, Mutahhar, 2016. "Do sovereign rating announcements have an impact on regional stock market co-movements? The case of Central and Eastern Europe," Economic Systems, Elsevier, vol. 40(4), pages 552-567.
    12. Böninghausen, Benjamin & Zabel, Michael, 2013. "Credit Ratings and Cross-Border Bond Market Spillovers," MPRA Paper 47390, University Library of Munich, Germany.
    13. Alsakka, Rasha & ap Gwilym, Owain, 2012. "Rating agencies' credit signals: An analysis of sovereign watch and outlook," International Review of Financial Analysis, Elsevier, vol. 21(C), pages 45-55.
    14. Drago, Danilo & Gallo, Raffaele, 2016. "The impact and the spillover effect of a sovereign rating announcement on the euro area CDS market," Journal of International Money and Finance, Elsevier, vol. 67(C), pages 264-286.
    15. Alsakka, Rasha & ap Gwilym, Owain, 2013. "Rating agencies’ signals during the European sovereign debt crisis: Market impact and spillovers," Journal of Economic Behavior & Organization, Elsevier, vol. 85(C), pages 144-162.
    16. Sung-Hoon Lim, 2011. "Risks in the North Korean Special Economic Zone: Context, Identification, and Assessment," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 47(1), pages 50-66, January.
    17. Sung-Hoon Lim, 2011. "Risks in the North Korean Special Economic Zone: Context, Identification, and Assessment," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 47(1), pages 50-66, January.
    18. Christopher F. Baum & Margarita Karpava & Dorothea Schäfer & Andreas Stephan, 2013. "Credit Rating Agency Announcements and the Eurozone Sovereign Debt Crisis," Discussion Papers of DIW Berlin 1333, DIW Berlin, German Institute for Economic Research.
    19. Chiwitt, Ulrich, 2014. "Ratingagenturen - Fluch oder Segen? Eine kritische Bestandsaufnahme," Arbeitspapiere der FOM 48, FOM Hochschule für Oekonomie & Management.
    20. Ibrahim Fatnassi & Zied Ftiti & Habib Hasnaoui, 2014. "Stock Market Reactions to Sovereign Credit Rating Changes: Evidence from Four European Countries," Working Papers 2014-111, Department of Research, Ipag Business School.
    21. repec:hur:ijaraf:v:7:y:2017:i:4:p:146-159 is not listed on IDEAS
    22. Bruno Ferreira Frascaroli & Jailson Da Conceição Teixeira De Oliveira, 2014. "A Performance Das Agências De Ratings De Risco Soberano E Os Fundamentos Macroeconômicos Dos Países: Um Estudo Sobre As Atribuições De Risco," Anais do XLI Encontro Nacional de Economia [Proceedings of the 41th Brazilian Economics Meeting] 121, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
    23. Boffelli, Simona & Urga, Giovanni, 2015. "Macroannouncements, bond auctions and rating actions in the European government bond spreads," Journal of International Money and Finance, Elsevier, vol. 53(C), pages 148-173.
    24. repec:fau:fauart:v:67:y:2017:i:3:p:250-275 is not listed on IDEAS
    25. Zabel, Michael & Böninghausen, Benjamin, 2013. "Credit Ratings and Cross-Border Bond Market Spillovers," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79724, Verein für Socialpolitik / German Economic Association.

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