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Foreign exchange market reactions to sovereign credit news

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  • Alsakka, Rasha
  • ap Gwilym, Owain

Abstract

We analyse the reaction of the foreign exchange spot market to sovereign credit signals by Fitch, Moody’s and S&P during 1994–2010. We find that positive and negative credit news affects both the own-country exchange rate and other countries’ exchange rates. We provide evidence on unequal responses to the three agencies’ signals. Fitch signals induce the most timely market responses, and the market also reacts strongly to S&P negative outlook signals. Credit outlook and watch actions and multiple notch rating changes have more impact than one-notch rating changes. Considerable differences in the market reactions to sovereign credit events are highlighted in emerging versus developed economies, and in various geographical regions.

Suggested Citation

  • Alsakka, Rasha & ap Gwilym, Owain, 2012. "Foreign exchange market reactions to sovereign credit news," Journal of International Money and Finance, Elsevier, vol. 31(4), pages 845-864.
    • Handle: RePEc:eee:jimfin:v:31:y:2012:i:4:p:845-864
    DOI: 10.1016/j.jimonfin.2012.01.007
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    More about this item

    Keywords

    Foreign exchange market; Emerging economies; Sovereign credit signal; Regional spillover effect; Credit outlook/watch;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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