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Sovereign Ratings and Their Impact on Recent Financial Crises

Author

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  • Roman Kraeussl

    (Center for Financial Studies, Frankfurt am Main, Germany)

Abstract

This paper discusses the role of credit rating agencies during the recent financial crises. In particular, it examines whether the agencies can add to the dynamics of emerging market crises. Academics and investors often argue that sovereign ratings are responsible for pronounced boom-bust cycles in emerging-markets lending. Using a VAR system this paper examines how US dollar bond yield spreads and international liquidity react to an unexpected sovereign rating change. Contrary to common belief and previous studies, the empirical results suggest that an abrupt downgrade does not necessarily intensify financial crises.

Suggested Citation

  • Roman Kraeussl, 2000. "Sovereign Ratings and Their Impact on Recent Financial Crises," Working Papers 0002, University of Crete, Department of Economics.
  • Handle: RePEc:crt:wpaper:0002
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    File URL: http://economics.soc.uoc.gr/wpa/docs/CFS-WP1.pdf
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    References listed on IDEAS

    as
    1. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    2. Anthony J. Richards & David Deddouche, 1999. "Bank Rating Changes and Bank Stock Returns—Puzzling Evidence from the Emerging Markets," IMF Working Papers 99/151, International Monetary Fund.
    3. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148 Elsevier.
    4. Kaminsky, Graciela L. & Schmukler, Sergio L., 1999. "What triggers market jitters?: A chronicle of the Asian crisis," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 537-560, August.
    5. Richard Cantor & Frank Packer, 1996. "Determinants and impact of sovereign credit ratings," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 37-53.
    6. Andrew Berg, 1999. "The Asia Crisis; Causes, Policy Responses, and Outcomes," IMF Working Papers 99/138, International Monetary Fund.
    7. Reisen, Helmut & von Maltzan, Julia, 1999. "Boom and Bust and Sovereign Ratings," International Finance, Wiley Blackwell, vol. 2(2), pages 273-293, July.
    8. Barry Eichengreen & Ashoka Mody, 1998. "What Explains Changing Spreads on Emerging-Market Debt: Fundamentals or Market Sentiment?," NBER Working Papers 6408, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Oshiro, Naoto & Saruwatari, Yasufumi, 2005. "Quantification of sovereign risk: Using the information in equity market prices," Emerging Markets Review, Elsevier, vol. 6(4), pages 346-362, December.
    2. Ashok Vir Bhatia, 2002. "Sovereign Credit Ratings Methodology; An Evaluation," IMF Working Papers 02/170, International Monetary Fund.
    3. Li, Huimin & Jeon, Bang Nam & Cho, Seong-Yeon & Chiang, Thomas C., 2008. "The impact of sovereign rating changes and financial contagion on stock market returns: Evidence from five Asian countries," Global Finance Journal, Elsevier, vol. 19(1), pages 46-55.

    More about this item

    Keywords

    Sovereign Ratings; Boom-Bust-Cycles; Financial Crises; VAR System;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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