Investors’ heterogeneous beliefs and the impact of sovereign credit ratings in foreign exchange and equity markets

Vu Tran, Rasha Alsakka and Owain ap Gwilym

The European Journal of Finance, 2019, vol. 25, issue 13, 1211-1233

Abstract: We propose a model in which sovereign credit news from multiple rating agencies interacts with market heterogeneity. The model illustrates that the first messenger discloses new information while additional messengers play an important role of coordinating heterogeneous beliefs. Empirical investigations based on sovereign credit ratings, foreign exchange and equity markets confirm that rating news coordinates investors’ beliefs. Sovereign credit rating news from both types of messenger induces a significant impact on exchange rates and stock indices. Volatility measures increase in response to news from the first messenger while ex-post volatility reduces following news from an additional messenger.

Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:taf:eurjfi:v:25:y:2019:i:13:p:1211-1233

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DOI: 10.1080/1351847X.2019.1586743

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