Reaction of Financial Markets of the Developing Countries on the Changes of Sovereign Credit Ratings

Abstract

The goal: to examine and compare the degrees and the characters of the emerging financial markets reactions that follow the rating announcements. Research tasks: 1) To study the main theoretical assumptions and previous works related to the analysis of market inefficiencies and, particularly, the credit rating impact on the market dynamics 2) To select, match and sample the data (historical quotations from FX, debt and equity markets of developing countries together with history of sovereign credit rating changes) in order to assure the correct comparability and interpretation of results. 3) To investigate whether sovereign credit rating changes lead to the abnormal reaction on considered markets and present the comparison and interpretation of differences in their behavior Main results: The event study method, applied in this paper. demonstrates that the emerging financial markets show quite a different reaction on the same event. The debt market reacts only on the upgrade of rating in foreign currency, stock exchanges returns reacted to all types of downgrades, while FX market is influenced by both downgrades and upgrades of the rating. At the same time, the values of abnormal returns do not differ dramatically among these markets. Significant events cause short-term reaction, the average length of which equals to 3 days. The directions of the price movements correspond to the expectations of majority of investors.