The impact of sovereign rating changes and financial contagion on stock market returns: Evidence from five Asian countries

This paper investigates the significance of changes in foreign currency sovereign credit ratings for both domestic and cross-country stock market returns of five Asian countries during the period from January 1990 to March 2003. Using the changes in sovereign credit ratings announced by Standard & Poor's, the panel estimation finds that stock returns in the Asian countries are affected by sovereign rating changes in their own and in other Asian countries. The credit rating agencies do not show strong evidence of pro-market-performance behavior during the 1997 Asian financial crisis. However, the contagion effect was found to exist in the sense that rating changes in one country affect stock market returns in other crisis-hit countries, which suggests that sovereign credit rating changes functioned as an additional channel of international financial contagion during the 1997 Asian financial crises.