Mateev_Credit Rating Announcement Effects (updated)

Mateev_Credit - The Effect of Sovereign Credit Rating Announcements on Emerging Bond and Stock Markets New Evidences Miroslav Mateev American

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The Effect of Sovereign Credit Rating Announcements on Emerging Bond and Stock Markets: New Evidences Miroslav Mateev * American University in Bulgaria 1 Izmirliev sq. 2700 Blagoevgrad, Bulgaria Е-mail: [email protected], Phone: +359 73 888 440 * The author is grateful to Atanas Videv, Managing director of BoraInvest Ltd. for providing the data on bond yields and stock price indices for different countries in the sample.
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The Effect of Sovereign Credit Rating Announcements on Emerging Bond and Stock Markets: New Evidences ABSTRACT This paper examines the impact of sovereign credit rating changes on emerging market economies. The motivation behind previous research in this area has been to evaluate the relevance of bond ratings for efficiency of financial markets; in particular, do rating agencies have superior information and/or analytical skills and hence can their announcements influence excess bond and equity returns? Reisen, & von Maltzan (1999), among others, argue that the sovereign ratings might be able to trigger pronounced boom-bust cycles in emerging market lending. The goal of this research is to evaluate the relevance of credit rating agencies for efficiency of financial markets in transition economies; in particular, do changes in sovereign ratings convey valuable information only to local market participants, or do they trigger contagious fluctuations in other markets, thus attributing to their financial instability. For that reason we study country-specific (or domestic) and cross-country (or foreign) spillover effects of rating changes. To capture the dynamic effects around the time of changes in ratings, we use the technique of event studies. We do find evidence that rating changes of sovereign bonds in one country trigger significant changes in yield spreads and stock market returns in other (neighboring) countries (the so-called cross-country contagion effect). In line with previous research the spillover effects of rating changes (downgrades in our case) are found to be stronger at the regional level. Keywords: emerging market, rating agency, sovereign debt, spillover effects, event studies JEL classification: G14, G15, G24 2
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INTRODUCTION In this paper we examine the impact of sovereign credit rating changes on bond and stock market returns in transition economies. Given the growing relevance of capital markets as a major source of funding for emerging market economies, the importance of credit rating agencies in providing standardized assessments of credit risk associated with emerging market investment, has continued to grow. Standard & Poor’s defines a credit rating as “a current opinion of the creditworthiness of an obligor with respect to a specific financial obligation, a special class of financial obligations, or a specific financial program” (Martell, 2005, p.2). A sovereign credit rating, then, reflect the rating agency’s opinion on the ability and willingness of sovereign governments to serve their outstanding financial obligations in
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This note was uploaded on 09/25/2011 for the course FINA 4320 taught by Professor John during the Spring '11 term at Houston Baptist.

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Mateev_Credit - The Effect of Sovereign Credit Rating Announcements on Emerging Bond and Stock Markets New Evidences Miroslav Mateev American

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