Sovereign Ratings and Eurobond Market Volatility

The financial crisis of 2008-2009 and its repercussions have emphasized the role that rating agencies play in the contemporary financial system. The purpose of the present research is to study the effect of changes in sovereign rating grade notations on the volatility of sovereign debt markets of BRICS countries. The fixed effects panel regressions were estimated for the sample of four and three BRICS countries over 2011-2015. For all of the specifications the first lag of the negative announcement variable is reported significant, while no perceivable effect of positive announcements is indicated, implying the existence of the asymmetric effect that rating events have on the sovereign bond return volatilities of the BRICS countries. The R-squared value is reported to be very high, mostly explained by the persistence of volatility. A set of control variables was chosen for these models, and the performed analysis revealed that only export-to-import ratio remained positive and significant in all specifications. The separate study of the Russian market models also demonstrates the effect of the negative rating events on the day of their announcement, unlike the panel model for BRICS countries. This may indicate that over the recent years Russian financial markets have been regarded as more risky and investors paid close attention to the rating agencies’ reports. Inflation rate is reported to have an impact on the bond returns volatility both with and without controlling for sanctions, though the author emphasizes that this is likely the result of it being a proxy for the exchange rate and oil prices effect on the Russian financial market. The sanctions variable itself is reported to be positive and significant.