Does sovereign debt ratings news spill over to international stock markets?

The evidence here indicates that sovereign debt rating and credit outlook changes of one country have an asymmetric and economically significant effect on the stock market returns of other countries over 1989–2003. There is a negative reaction of 51 basis points (two-day return spread vis-á-vis the US) to a credit ratings downgrade of one notch in a common information spillover around the world. Upgrades, however, have no significant impact on return spreads of countries abroad. Closeness (e.g., geographic proximity) and emerging market status amplify the effect of a spillover. Downgrade spillover effects at the industry level are more pronounced in traded goods and small industries.     

Output spillovers from changes in sovereign credit ratings

This research examines how a sovereign rating revision of one country influences the economic growth rates of other countries. Rating revisions have significant output spillover effects: A one-notch upgrade (downgrade) prompts on average a significant downward revision of about 0.03% (0.07%) in the consensus forecast of annual economic growth rates of other countries in the two-month period after the event. The spillovers are transmitted through direct and indirect trade and financial linkages between event and non-event countries. The evidence indicates that a predominance of differential (common) spillovers leads upgrades (downgrades) to produce adverse output effects for other countries.     

The reaction of emerging market credit default swap spreads to sovereign credit rating changes

This paper examines the effect of sovereign credit rating change announcements on the CDS spreads of the event countries, and their spillover effects on other emerging economies’ CDS premiums. We find that positive events have a greater impact on CDS markets in the two-day period surrounding the event, and are more likely to spill over to other emerging countries. Alternatively, CDS markets anticipate negative events, and previous changes in CDS premiums can be used to estimate the probability of a negative credit event. The transmission mechanisms for positive events are the common creditor and competition in trade markets.     

Effect of the Sovereign Credit Ratings in East Asia Countries: Evidence from Panel Vector Autoregression

We study the effect of the sovereign credit ratings on the economies of seven East Asian countries, applying panel vector autoregression (VAR). We find that rating has less effect than outlook of rating on the credit default swap (CDS) spreads, the stock indexes, and the GDP growth rates. Rating upgrade and positive outlook have stronger effects than rating downgrade and negative outlook, and the effects of positive outlook and rating are greater after the financial crisis. There is evidence of contagion in that the economic variables of a country seem to have been affected by the outlooks of the other countries.     

The Real Effects of Credit Ratings: The Sovereign Ceiling Channel

We show that sovereign debt impairments can have a significant effect on financial markets and real economies through a credit ratings channel. Specifically, we find that firms reduce their investment and reliance on credit markets due to a rising cost of debt capital following a sovereign rating downgrade. We identify these effects by exploiting exogenous variation in corporate ratings due to rating agencies' sovereign ceiling policies, which require that firms' ratings remain at or below the sovereign rating of their country of domicile.     

An Empirical Study of International Spillover of Sovereign Risk to Bank Credit Risk

The severity and complexity of the recent financial crisis has motivated the need for understanding the relationships between sovereign ratings and bank credit ratings. This is the first study to examine the impact of the “international” spillover of sovereign risk to bank credit risk through both a ratings channel and an asset holdings channel. In the first case, the downgrade of sovereign ratings in GIIPS (Greece, Italy, Ireland, Portugal, and Spain) countries leads to rating downgrades of banks in the peripheral countries. The second channel indicates that larger asset holdings of GIIPS debt increases the credit risk of cross‐border banks, and hence, the probabilities of downgrade.     

The impact and the spillover effect of a sovereign rating announcement on the euro area CDS market

This paper analyzes the impact and the spillover effect of a sovereign rating announcement on the euro area CDS market. Through the event study technique, we demonstrate that downgrades and upgrades considerably affect financial markets. The relevance of the impact is due to the introduction of “new” information after a rating change announcement (information discovery effect) and to the role of rating in the current financial regulation (certification effect). Conversely, the CDS market does not seem to react significantly to rating warning (outlook and review) announcements. Furthermore, we find evidence of a spillover effect only after a downgrade announcement. Our results show that the size of the spillover effect is influenced by economic and financial conditions of analyzed countries and that international bank flows between EMU Members represent an important transmission channel of the spillover effect.     

主权债务风险跨国溢出研究——来自频域的新证据

本文从国家间主权债务风险溢出的持续期角度出发,采用基于广义方差分解谱表示的BK溢出指数方法,首次从频域视角对短期和长期下的主权债务风险跨国溢出效应进行研究。研究发现:第一,短期和长期下的主权债务风险跨国溢出效应均较为显著,并且时域下的总溢出主要由短期的风险溢出主导。第二,14个国家的短期和长期风险输出水平呈线性关系,但对于风险输入,不同类型国家出现分化并形成两个聚类,新兴市场国家的短期风险输入水平远高于长期,其具有较强的“短期脆弱性”。第三,风险输出国的自身风险越大,对他国的长期溢出水平越高,风险输入国的自身风险越大,接收他国的短期溢出水平越高,并且两两国家间的进出口规模、金融市场一体化水平和经济周期协同性与其长期风险溢出水平呈正相关关系,而与其短期风险溢出水平的关系并不显著。第四,短期和长期的主权债务风险溢出网络都呈现明显的区域聚集特征,并且各国在短期溢出网络中主要与同区域以及经济金融环境相似的国家连接,在长期溢出网络中则通过经贸关系将连接范围扩大至不同区域甚至经济金融环境差异较大的国家。     

Measuring Sovereign Risk: Are CDS Spreads Better than Sovereign Credit Ratings?

Using data for 54 countries over a 12‐year period, we find that the variation in average sovereign ratings in a given year can be explained by average credit default swap (CDS) spreads over the previous three years. In a horse race between CDS spreads and sovereign ratings, we find that CDS spread changes can predict sovereign events, while rating changes cannot. The predictability of CDS spreads is greater when there is disagreement between Moody's and the S&P for a country's rating.     

主权债务风险跨国溢出研究——来自频域的新证据

本文从国家间主权债务风险溢出的持续期角度出发,采用基于广义方差分解谱表示的BK溢出指数方法,首次从频域视角对短期和长期下的主权债务风险跨国溢出效应进行研究。研究发现:第一,短期和长期下的主权债务风险跨国溢出效应均较为显著,并且时域下的总溢出主要由短期的风险溢出主导。第二,14个国家的短期和长期风险输出水平呈线性关系,但对于风险输入,不同类型国家出现分化并形成两个聚类,新兴市场国家的短期风险输入水平远高于长期,其具有较强的“短期脆弱性”。第三,风险输出国的自身风险越大,对他国的长期溢出水平越高,风险输入国的自身风险越大,接收他国的短期溢出水平越高,并且两两国家间的进出口规模、金融市场一体化水平和经济周期协同性与其长期风险溢出水平呈正相关关系,而与其短期风险溢出水平的关系并不显著。第四,短期和长期的主权债务风险溢出网络都呈现明显的区域聚集特征,并且各国在短期溢出网络中主要与同区域以及经济金融环境相似的国家连接,在长期溢出网络中则通过经贸关系将连接范围扩大至不同区域甚至经济金融环境差异较大的国家。     

INTERNATIONAL BANK FLOWS TO EMERGING MARKETS: INFLUENCE OF SOVEREIGN CREDIT RATINGS AND THEIR REGIONAL SPILLOVER EFFECTS

We examine whether changes in sovereign credit assessments help determine international bank flows to emerging countries. We focus on the bank flows of G7 countries to a sample of 55 emerging market borrowers for 1995–2008. We find evidence indicating that sovereign credit rating revisions have significant and positive influences on international bank flows from developed markets even after controlling for other determinants. In addition, we find strong regional rating spillover effects. Ratings improvements in one emerging market region tend to reduce bank flows to the other regions. However, there is an exception from the Asia Pacific to Eastern Europe.     

主权评级对市场影响的实证分析

主权评级作为市场信息传递中介备受质疑。本文考察了目前欧洲债务危机中的主权评级,采用固定效应模型分别研究三大评级机构主权评级观察及评级降级对欧元区国家融资成本的市场影响。结果表明,主权评级对于市场长期影响不是很大,其中独立的降级影响不显著;评级负面观察的市场影响较评级降级的独立影响显著;评级观察及降级变化尽管对高级别国家的影响有限,但对A级以下的国家有明显的冲击影响。评级结果可能加剧了欧洲债务危机的解决难度。     

Do sovereign rating changes trigger spillover effects?

This paper examines whether changes in a particular country's sovereign ratings provided by Standard and Poor's and Moody's trigger a spillover effect on other countries. The analysis focuses on two sets of countries namely where there are trade links between the countries and where there are links between the financial markets of each country. The findings indicate that there are more significant results when the links in financial markets are analysed compared to trade links. Moreover, the results are dependent on which rating is under analysis, that is, Standard and Poor's Local Currency, Standard and Poor's Foreign Currency, Moody's Bank Deposit or Moody's bonds and notes. Finally, there does appear to be a contamination effect for both upgrades and downgrades among the countries.     

Sovereign ceilings “lite”? The impact of sovereign ratings on corporate ratings

Although credit rating agencies have gradually moved away from a policy of never rating a corporation above the sovereign (the ‘sovereign ceiling’), it appears that sovereign credit ratings remain a significant determinant of corporate credit ratings. We examine this link using data for advanced and emerging economies over the period of 1995–2009. Our main result is that a sovereign ceiling continues to affect the rating of corporations. The results also suggest that the influence of a sovereign ceiling on corporate ratings remains particularly significant in countries where capital account restrictions are still in place and with high political risk.     

The anatomy of sovereign risk contagion

The channels for the cross-border propagation of sovereign risk in the international sovereign debt market are analysed. Identifying sovereign credit events as extraordinary jumps in CDS spreads, we distinguish between the immediate effects of such events and their longer term spillover effects. To analyse “fast and furious” contagion, we use daily CDS data to conduct event studies around a total of 89 identified credit events in a global country sample. To analyse “slow-burn” spillover effects, we apply a multifactor risk model, distinguishing between global and regional risk factors. We find that “fast and furious” contagion has been primarily a regional phenomenon, whilst “slow-burn” spillover effects can often be global in scope, especially those of the recent European debt crisis. The global risk factors are found to be driven by investor risk appetites and debt levels, whilst the regional factors depend on economic fundamentals of countries within a region.     

How do sovereign credit rating changes affect private investment?

Sovereign credit rating changes have an influence on real private investment of re-rated countries. We find significant increases in private investment growth following upgrades in sovereign ratings. These increases, however, are transitory. We also find significant, temporary declines in private investment growth following sovereign rating downgrades. The results hold after accounting for re-rated countries’ growth opportunities, endogeneity, and other factors that could affect private investment. The irreversible nature of investment may be the explanation for the temporary changes in the growth rates of physical capital investment associated with revisions in sovereign credit ratings.     

Self-fulfilling dynamics: The interactions of sovereign spreads,sovereign ratings and bank ratings during the euro financial crisis

During the euro-area financial crisis, interactions among sovereign spreads, sovereign credit ratings, and bank credit ratings appeared to have been characterized by self-generating feedback loops. To investigate the existence of feedback loops, we consider a panel of five euro-area stressed countries within a three-equation simultaneous system in which sovereign spreads, sovereign ratings and bank ratings are endogenous. We estimate the system using two approaches. First we apply GMM estimation, which allows us to calculate persistence and multiplier effects. Second, we apply a new, system time-varying-parameter technique that provides bias-free estimates. Our results show that sovereign ratings, sovereign spreads, and bank ratings strongly interacted with each other during the euro crisis, confirming strong doom-loop effects.     

Effects of Preferred Stock Re-rating on Common Stock Prices: Further Evidence

This study examines the price reactions of common stocks to changes in preferred stock ratings, with focuses on firms with less information available in the market as well as on firms with a relatively larger proportion of preferred stock financing. Emphasis on differential information and the relative size of preferred stocks across firms provide a more powerful test of the effect of rating changes on stock prices. Contrary to previous studies that report no price effect on common stocks due to preferred stock re-ratings, these results show that for low-information firms and for firms with a larger proportion of preferred stocks in their capital structure, a preferred stock rating downgrade exerts significant negative price effect on common stocks during the two-day announcement period. Our findings also have implications for future studies of other firm-specific events such as security offerings, stock repurchases, and convertible calls.     

Sovereign credit ratings and financial markets linkages: Application to European data

We use EU sovereign bond yield and CDS spreads daily data to carry out an event study analysis on the reaction of government yield spreads before and after announcements from rating agencies (Standard & Poor’s, Moody’s, Fitch). Our results show significant responses of government bond yield spreads to changes in rating notations and outlook, particularly in the case of negative announcements. Announcements are not anticipated at 1–2 months horizon but there is bi-directional causality between ratings and spreads within 1–2 weeks; spillover effects especially among EMU countries and from lower rated countries to higher rated countries; and persistence effects for recently downgraded countries.     

Sustainability and sovereign credit risk

The study investigates the impact of Environmental, Social, and Governance (ESG) ratings on sovereign credit risk. The study measures sovereign credit risk using a market-based, structural and an analyst-based approach, while ESG scores are obtained from three different rating agencies. The contributions of this paper are multifold. First, we discover that higher sustainability performance at the corporate level significantly decreases market-based (CDS spreads) and structural (Distance-to-default) sovereign credit risk but has no consistent impact on analyst-based (Credit ratings) sovereign credit risk measure. Second, by expanding our research to include the concept of financial materiality based on the SASB materiality map, we break down and highlight the sustainability themes that require the most attention at the sovereign level and those that can affect the credit health of countries. Third, we demonstrate that the relationship between sustainability and sovereign credit risk varies across ESG rating providers, supporting the widespread belief that sustainability metrics lack standardization and are difficult to compare across providers.