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The effect of credit ratings on emerging market volatility

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  • Bales, Kyle
  • Malikane, Christopher

Abstract

We use an EGARCH model and a fixed effects panel regression to investigate the reaction of emerging market stock and bond volatility to sovereign credit ratings changes. The daily data covers the period of 1990–2016 and includes time periods of emerging market crises. The results are divided between their effect on stock and on bond volatility. The estimations provide evidence of an asymmetric effect of rating changes on stock volatility. Downgrades have a significant impact on stock volatility, while upgrades have no such effect. For bonds the effect on volatility is ambiguous with both upgrades and downgrades having an effect. Furthermore, downgrades increase both stock and bond market volatility.

Suggested Citation

  • Bales, Kyle & Malikane, Christopher, 2020. "The effect of credit ratings on emerging market volatility," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 65(C).
    • Handle: RePEc:eee:intfin:v:65:y:2020:i:c:s1042443120300706
    DOI: 10.1016/j.intfin.2020.101186
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    Cited by:

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    5. Cuadros-Solas, Pedro Jesús & Salvador Muñoz, Carlos, 2022. "Disentangling the sources of sovereign rating adjustments: An examination of changes in rating policies following the GFC," Research in International Business and Finance, Elsevier, vol. 59(C).

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    More about this item

    Keywords

    Sovereign credit ratings; Stock volatility; Bond volatility;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance

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