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Do Changes in Sovereign Credit Ratings Contribute to Financial Contagion in Emerging Market Crises?

Author

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  • Roman Kraeussl

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

Abstract

Credit rating changes for long-term foreign cur¬rency debt may act as a wake-up call with upgrades and downgrades in one country af¬fecting other financial markets within and across national borders. Such a potential (contagious) rating effect is likely to be stronger in emerging market economies, where institutional investors’ problems of asymmetric information are more present. This empirical study complements earlier research by explicitly examining cross-security and cross-country contagious rating effects of credit rating agencies’ sovereign risk assessments. In particular, the specific impact of sovereign rating changes during the financial turmoil in emerging markets in the latter half of the 1990s has been examined. The results indicate that sovereign rating changes in a ground-zero country have a (statistically) significant impact on the financial markets of other emerging market economies although the spillover effects tend to be regional.

Suggested Citation

  • Roman Kraeussl, "undated". "Do Changes in Sovereign Credit Ratings Contribute to Financial Contagion in Emerging Market Crises?," Working Papers 0314, University of Crete, Department of Economics.
  • Handle: RePEc:crt:wpaper:0314
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    File URL: http://economics.soc.uoc.gr/wpa/docs/cfs_rating_2.doc
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    References listed on IDEAS

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    Cited by:

    1. Saurav Roychoudhury & Robert A. Lawson, 2010. "Economic freedom and sovereign credit ratings and default risk," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 2(2), pages 149-162, June.
    2. Kocsis, Zalán & Mosolygó, Zsuzsa, 2006. "A devizakötvény-felárak és a hitelminősítések összefüggése - keresztmetszeti elemzés. A cross-section analysis
      [The relationship of international bond spreads and sovereign credit ratings]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(9), pages 769-798.

    More about this item

    Keywords

    Sovereign Risk; Credit Ratings; Financial Contagion;

    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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