Title: Sovereign credit rating change in emerging markets and its impact on their financial markets

Authors: Meysam Safari; Mohamed Ariff

Addresses: Graduate School of Business, SEGi University, 47810, Kota Damansara, Selangor, Malaysia ' Faculty of Economics and Management, University Putra Malaysia, 43400, Serdang, Selangor, Malaysia

Abstract: Credit rating revision has become rampant in recent years for sovereign borrowers. Downgrading has economic and social changes leading to hardship. This study examines the effect of sovereign credit rating change announcement in a number of bond, stock, and future markets for a sample of 94 rating change announcements from nine developing countries. Our findings indicate significant effect on the sovereign bond index as well as national stock market index values. Both markets show indication of information leakage prior to announcement day. The stock future market only shows reaction to downgrade announcement. Hence, future market is not sensitive to sovereign rating upgrade which is consistent with spot market behaviour as well. The results add new findings especially on flow-on-effect to shares and futures securities.

Keywords: credit risk; sovereign credit rating; bonds; stocks; futures market; credit rating change; default risk; emerging markets; event study; financial markets; information leakage; spot market.

DOI: 10.1504/IJBD.2015.071400

International Journal of Bonds and Derivatives, 2015 Vol.1 No.3, pp.203 - 216

Received: 27 Dec 2014
Accepted: 12 Feb 2015
Published online: 25 Aug 2015 *

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