The Impact of Sovereign Credit Ratings on Financial Markets

This work focuses on sovereign credit ratings which provide assessment of the probability for national governments to serve debts in time. Even the advantages of ratings are evident (they solve the problem of asymmetric information and decrease transaction costs), they are criticized for overwhelmed influence on investors and the ability to amplify the financial crises. Consequently, it is indispensable to understand how public information provided by rating agencies reflects the market in order to evaluate investment opportunities and predict future tendencies in the market. The main aim of this work is to measure the effect of credit rating announcements in two directions. Firstly, the impact on the stock and CDS markets for the change rating issuer with the use of event study. The sample of countries consists of emerging, developed and frontier markets. We show that frontier countries have bigger effect from upgrades in CDS market, but more significant downgrades for stock markets. The reaction for emerging markets in both cases is slower than for other countries. The influence from sovereign credit ratings on developed countries is faster for CDS markets. Besides, we obtain that in general upgrades from S&P’s have the biggest effect on frontier countries, downgrades form Fitch and S&P influence mostly emerging countries. Secondly, the spillover effect in the stock market between the members of APEC was verified. The contagion effect of Fitch upgrades and downgrades was verified and proved for the members of APEC while previous studies focused mostly on regional neighbors and Euro zone. The main finding here is the asymmetric contagion effect: downgrades provide immediate benefits for non-event countries; upgrades also positively influence other’s stock returns, but slower than negative changes. The results from this study are useful for investors, policymakers and economists on order to understand and predict the situation in the global financial markets.