Sovereign Ratings and Their Impact on Recent Financial Crises
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.
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