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Sovereign Credit Ratings, Emerging Market Risk and Financial Market Volatility

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  • Reisen, Helmut
  • von Maltzan, Julia

Abstract

This study has investigated to which extent rating events influence sovereign bond yield spreads and overall financial market volatility. While rating agencies are part and parcel of today's financial markets, the study succeeds in tracing some independent effect that ratings exert on financial market prices. First, our Granger causality test cautions against overestimating the independent longrun impact that sovereign credit ratings exert on the financial-market assessment of sovereign risk, however. The financial market and the two leading rating agencies appear broadly to share the same model in that assessment. As indicated by the explanatory power of the equations that underlie the causality test, dollar bond spreads and a set of default determinants seem to explain somewhat better the level of credit ratings than vice versa. The mutual interaction between sovereign yield spreads and ratings may be characterised by the nature of sovereign risk (requiring assessments on present and future willingness rather than only ability to pay), the information content of sovereign risk ratings („contaminating“ rating changes with other publicly-available news) and the industrial organisation of the rating industry (introducing an upward bias in sovereign ratings). Second, contrary to our expectations, our event studies find a highly significant announcement effect – obviously muted by strong market anticipation – when emerging-market sovereign bonds are put on review with negative outlook. The result may surprise, beyond the above considerations, because the rating of these bonds is fairly new to the industry; this lack of experience is reflected by a high degree of split ratings. Negative rating announcements seem also to be effective in the aftermath of rating deteriorations (possibly not fully captured by the length of our observation window), as investors are incited to reorient their portfolios. Positive rating events, by contrast, do not seem to have a significant an
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Suggested Citation

  • Reisen, Helmut & von Maltzan, Julia, 1998. "Sovereign Credit Ratings, Emerging Market Risk and Financial Market Volatility," Discussion Paper Series 26222, Hamburg Institute of International Economics.
    • Handle: RePEc:ags:hwwadp:26222
    DOI: 10.22004/ag.econ.26222
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    1. Hand, John R M & Holthausen, Robert W & Leftwich, Richard W, 1992. "The Effect of Bond Rating Agency Announcements on Bond and Stock Prices," Journal of Finance, American Finance Association, vol. 47(2), pages 733-752, June.
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    Cited by:

    1. Daniel Cohen, 2011. "La crise grecque. Leçons pour l'Europe," Revue économique, Presses de Sciences-Po, vol. 62(3), pages 383-394.
    2. Bilal Kargi, 2014. "Credit Default Swap (Cds) Spreads: The Analysis Of Time Series For The Interaction With The Interest Rates And The Growth In Turkish Economy," Montenegrin Journal of Economics, Economic Laboratory for Transition Research (ELIT), vol. 10(1), pages 59-66.
    3. Camille Baulant & Nivine Albouz, 2021. "Has financial globalization since 1990 reduced income inequality: the role of rating announcements on the volatility and the returns of the Brazilian Financial Market [Les annonces de notation souv," Working Papers hal-03258994, HAL.
    4. Mora, Nada, 2006. "Sovereign credit ratings: Guilty beyond reasonable doubt?," Journal of Banking & Finance, Elsevier, vol. 30(7), pages 2041-2062, July.
    5. Afonso, António & Gomes, Pedro & Taamouti, Abderrahim, 2014. "Sovereign credit ratings, market volatility, and financial gains," Computational Statistics & Data Analysis, Elsevier, vol. 76(C), pages 20-33.
    6. Andrew CORNFORD, 2000. "The Basle Committee’S Proposals For Revised Capital Standards: Rationale, Design And Possible Incidence," G-24 Discussion Papers 3, United Nations Conference on Trade and Development.
    7. José Wong, 2000. "Are changes in spreads of external-market debt also induced by contagion?," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 35(2), pages 72-80, March.
    8. Broto, Carmen & Molina, Luis, 2016. "Sovereign ratings and their asymmetric response to fundamentals," Journal of Economic Behavior & Organization, Elsevier, vol. 130(C), pages 206-224.
    9. Gande, Amar & Parsley, David, 2010. "Sovereign Credit Ratings, Transparency and International Portfolio Flows," MPRA Paper 21118, University Library of Munich, Germany.
    10. Galina Hale, 2005. "Courage to Capital? A Model of the Effects of Rating Agencies on Sovereign Debt Roll–over," The Institute for International Integration Studies Discussion Paper Series iiisdp062, IIIS.
    11. Bussière, M. & Ristiniemi, A., 2012. "Credit Ratings and Debt Crises," Working papers 396, Banque de France.
    12. Martín González‐Rozada & Eduardo Levy Yeyati, 2008. "Global Factors and Emerging Market Spreads," Economic Journal, Royal Economic Society, vol. 118(533), pages 1917-1936, November.
    13. Zoran Ivanovic & Sinisa Bogdan & Suzana Baresa, 2015. "Modeling and Estimating Shadow Sovereign Ratings," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 9(3), September.
    14. Athari, Seyed Alireza & Kondoz, Mehmet & Kirikkaleli, Dervis, 2021. "Dependency between sovereign credit ratings and economic risk: Insight from Balkan countries," Journal of Economics and Business, Elsevier, vol. 116(C).
    15. Gabriel Caldas Montes & Diego Silveira Pacheco Oliveira, 2019. "Central bank transparency and sovereign risk ratings: a panel data approach," International Economics and Economic Policy, Springer, vol. 16(2), pages 417-433, April.
    16. Thomas Url, 2012. "Rating Agencies: Creating, Amplifying or Drawn by Events in the Sovereign Debt Crisis?," Austrian Economic Quarterly, WIFO, vol. 17(2), pages 108-121, May.
    17. Montes, Gabriel Caldas & Valladares, Matheus & de Moraes, Claudio Oliveira, 2021. "Impacts of the sovereign risk perception on financial stability: Evidence from Brazil," The Quarterly Review of Economics and Finance, Elsevier, vol. 81(C), pages 358-369.
    18. Gaurav Dawar & Shivangi Bhatia & Jai Parkash Bindal, 2023. "Does Credit Rating Revisions Affect the Price of Common Stock: A Study of Indian Capital Market," Business Perspectives and Research, , vol. 11(2), pages 190-209, May.
    19. Gabriel Caldas Montes & Diego S. P. Oliveira & Helder Ferreira Mendonça, 2016. "Sovereign Credit Ratings in Developing Economies: New Empirical Assessment," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 21(4), pages 382-397, October.
    20. Thomas Url, 2011. "Ratingagenturen: Verursacher, Verstärker oder im Sog der Staatsschuldenkrise?," WIFO Monatsberichte (monthly reports), WIFO, vol. 84(12), pages 811-825, December.

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