Emerging Markets Instability : Do Sovereign Ratings Affect Country Risk and Stock Returns?

By Graciela L. Kaminsky, S. Schmukler. 2002

110 citations recorded by the source corpus.

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. We find that changes in sovereign ratings have an impact on country risk and stock returns. We 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.

Subfields: Finance

View Paper: https://www.semanticscholar.org/paper/e7431ddbbce095236c623fe544e237d70e0ab87b

Citations in the corpus

• The price of democracy: sovereign risk ratings, bond spreads and political business cycles in developing countries (2004, unknown): “For instance, are there negative spillover effects on sovereign ratings and or bond spreads for one developing country when a neighboring country holds an election? Kaminsky and Schmukler (2001) suggest that there may be such spillovers during severe financial crises.”
• Sovereign Rating News and Financial Markets Spillovers: Evidence from the European Debt Crisis (2011, unknown): “Gande and Parsley (2005) and Kaminsky and Schmuckler (2002).”
• Default and Recovery Implicit in the Term Structure of Sovereign CDS Spreads (2008, unknown): “Discounting by rt + λ Q t captures the survival-dependent nature of these payments (Lando [1998]).”
• The Impact of Macroeconomic Announcements on Emerging Market Bonds (2005, unknown): “Kaminsky and Schmukler (1999) investigate what types of local and neighboring- country news moved stock markets during the Asian crisis.”
• The impact of sovereign credit risk on bank funding conditions (2011, unknown): “Kaminsky and Schmukler (2002) find that sovereign ratings and outlooks in emerging markets generate cross-country contagion and affect both bonds and stocks; effects are stronger during crises. Correa et al (2011) find that, over the past 15 years, sovereign downgrades in advanced countries and emer”
• Does sovereign debt ratings news spill over to international stock markets (2007, unknown): “Kaminsky and Schmukler (2002) show that emerging market sovereign rating news is contagious for bond and stock markets in emerging markets, particularly during periods of turmoil and particularly for neighboring countries.”