National Sovereign Credit Ratings, Cross-nation Contagion and Stock Market Responses: Evidence from the Event Study of 48 Economies

Feng Qian

doi:doi:10.16538/j.cnki.jfe.2016.08.006

Abstract

A grasp of the market impact and transmission mechanism of sovereign credit rating changes is of great significance to by investors, the maintenance of national financial security, and countermeasures taken by governments. This paper uses event study and a total sample of rating events of 48 economies, including China, and daily stock returns data from 1990 to 2013 to empirically study the impact of sovereign credit ratings changes on the stock market and its transmission channels.It comes to the following conclusions:firstly, sovereign credit ratings downgrading generates significantly negative abnormal returns on the stock market, but abnormal returns resulting from sovereign credit ratings upgrading are not significant; secondly, the stock market can predict the event of sovereign credit ratings downgrading in advance, but cannot predict the event of sovereign credit ratings upgrading; thirdly, monsoon effect provides the explanation of market contagion of ratings adjustment to some extent; fourthly, related variables of net contagion effect are basically not significant, illustrating thatmarket contagion of ratings events should have an economic base and is not caused by psychological expectations (this kind of non-fundamental factors) of investors; fifthly, spillover effect can better explain market contagion of sovereign credit ratings, and is the main channel of the effect of changes in sovereign credit ratings on stock market and contagion.The conclusions deepen the understanding of the effect of changes in sovereign credit ratings on stock market and its different transmission channels, and also provide a useful inspiration for China to prevent from its own sovereign credit ratings change risk.