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Emerging markets instability: do sovereign ratings affect country risk and stock returns?

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  • Kaminsky,Graciela
  • Schmukler,Sergio L.

Abstract

Financial 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. interest rates.

Suggested Citation

  • Kaminsky,Graciela & Schmukler,Sergio L., 2001. "Emerging markets instability: do sovereign ratings affect country risk and stock returns?," Policy Research Working Paper Series 2678, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2678
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    References listed on IDEAS

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    Keywords

    Financial Intermediation; Environmental Economics&Policies; Banks&Banking Reform; Payment Systems&Infrastructure; Insurance&Risk Mitigation; Economic Theory&Research;

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