The effect of country risk ratings on market returns

Oliver Schnusenberg, Jeff Madura and Kimberly Gleason

Applied Financial Economics, 2007, vol. 17, issue 16, pages 1289-1299

Abstract: Studies have found that bond ratings can affect the stock prices of individual companies. These studies suggest that investors rely on third parties when valuing companies. Our goal is to determine whether ratings have a similar influence on a country's valuation. We assess the country ratings of Coface Group, which indicate the general sensitivity of companies to the business, financial and political outlook of a country. Given the proliferation of country index funds, investors could easily revise top down asset allocation in response to ratings changes. We find that country stock market valuations are not affected by changes in country ratings. While country ratings may still be useful in signalling potential debt coverage or political problems, they do not appear to influence investor valuations of country stock markets.

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