Stock Market Impact of Sovereign Rating Changes: Alternative Benchmark Models

Emawtee Bissoondoyal-Bheenick and Robert Brooks

Chapter 13 in Emerging Markets and Sovereign Risk, 2015, pp 231-252 from Palgrave Macmillan

Abstract: Abstract Given the current state of the world capital markets, more emphasis is being placed on the growing importance of credit rating agencies in providing standardised assessment of credit risk. One of the main applications of credit ratings is to assess the risk exposure of a national market. Sovereign credit ratings often serve as a ceiling for private sector ratings of any given country, which stretches their influence far beyond government securities. The change of sovereign ratings is one of the key factors that may trigger re-weighting of the portfolios held. One component of the literature assesses the national stock market impact of sovereign ratings changes (see for example Brooks, Faff, Hillier, & Hillier 2004; Pukthuanthong-Le, Elayan, & Rose 2007; Ferreira & Gama, 2007). Most of the studies in this area have used an event study methodology to assess the impact of sovereign ratings changes on stock market return. It should be noted though that most of these studies have used the conventional market model to calculate the abnormal return in the event study. The sovereign rating literature suggests that rating downgrades generally have a significant impact on the market, while rating upgrades do not have the same informative value. This study uses different benchmark models to test the validity of the results that are found in previous papers.

Keywords: Asset Price; Abnormal Return; Market Model; Downside Risk; Cumulative Abnormal Return (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-1-137-45066-1_13

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DOI: 10.1057/9781137450661_13

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