RMIT University

The Impact of Sovereign Rating Changes on National Stock Market Risk and Return

Email address: robert.brooks@rmit.edu.au

Keywords: Sovereign Rating Changes; Event Study; Country Beta Risk

JEL Classifications: G12, G14

Abstract:
In this study we investigate the aggregate stock market impact (on return and risk) of Sovereign rating changes, using a sample of the countries over the period 1990 to 2000. Our analysis is performed with respect to both foreign (FC) and local currency (LC) ratings changes. We perform two levels of investigation - initially an event study analysis and then a cross-sectional regression approach - the latter attempting to explain the change in beta risk around the ratings change event. With reference to the event study experiment, in short our findings echo those widely documented for ratings changes for individual companies - basically, upgrades don't have a great wealth impact while downgrades do. With reference to the cross-sectional regression part of our experiment, several additional findings are identified. First, with regard to the FC ratings change sample the only significant average beta risk change relates to the 'major' (> one step) downgrade sample. Second, when the regression model is modified to accommodate the potentially asymmetric role of size, the size variable is found to be significant - negatively so in the 'minor' FC upgrade sample and positively so in the 'major' FC downgrade sample. Finally, with regard to the cross-sectional analysis of LC rating changes, overwhelmingly there is a universal absence of any statistically significant relationship. These findings should be of great interest to all investor groups (including funds) - particularly, those with a global focus, since there are important implications here regarding international asset allocation - particularly during times of marked Sovereign ratings change.

PDF file of paper: brooks.pdf

Session: Asset Prices II

Time: Sunday, 8 July, 8am - 9:30am

Room: C