| Summary: | 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.
|
|---|