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The effect of country risk ratings on market returns

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  • Oliver Schnusenberg
  • Jeff Madura
  • Kimberly Gleason

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.

Suggested Citation

  • Oliver Schnusenberg & Jeff Madura & Kimberly Gleason, 2007. "The effect of country risk ratings on market returns," Applied Financial Economics, Taylor & Francis Journals, vol. 17(16), pages 1289-1299.
    • Handle: RePEc:taf:apfiec:v:17:y:2007:i:16:p:1289-1299
    DOI: 10.1080/09603100600993786
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    Cited by:

    1. Emawtee Bissoondoyal-Bheenick & Robert Brooks & Samantha Hum & Sirimon Treepongkaruna, 2011. "Sovereign rating changes and realized volatility in Asian foreign exchange markets during the Asian crisis," Applied Financial Economics, Taylor & Francis Journals, vol. 21(13), pages 997-1003.

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