Abstract
PurposeThis study examines the effect of the informational content of local credit rating announcements in emerging markets on the liquidity of their bond markets. This study analyses the liquidity of bonds in various emerging bond markets using a sample of nine countries: Argentina, Mexico, Peru, Hungary, Poland, Spain, Turkey, Hong Kong and Greece. The sample includes daily data on sovereign bonds that go from July 2009 to July 2017. The main focus is on the period before and after the sovereign debt crisis. This study notes that the bond liquidity is affected due to the sign of the rating granted by the rating agencies for each country.Design/methodology/approachThis study aims to question the sources of liquidity problem of sovereign bonds issued by the emerging countries. The study’s database consists of daily data of all nine emerging countries for the period from July 2009 to July 2017. Panel data were collected from the Datastream database.FindingsThis study first directly tests the information content of bond ratings announcements and their effect on bond market liquidity. Next, the impact of rating changes on sovereign bond liquidity around the rating announcements is studied. Rating changes can affect sovereign bond's price, trading and liquidity around the announcement date. In particular the rating changes that move the bonds out of the investment grade category can elicit selling pressure or even fire sale of the fallen angels.Originality/valueThis research aims to present data on the prices of sovereign bonds that react to changes in credit rating by studying the price movements around the announcement of changes in credit rating. The literature is very rich in studies on credit rating changes on stocks and corporate bonds, but this study is perhaps the first attempt on sovereign bonds.
Highlights
The information extracted from the changed notes has been an appropriate issue in recent years
This paper examines the effect of credit rating announcement on bond liquidity, using the panel data methodology over 2009–2017 across nine countries such as Argentina, Poland, LIQ
Since the role of credit rating agencies in the sovereign debt crisis in the financial phase (2007–2008) of the current crisis is degrading, a lot of criticism was voiced against rating agencies, investors affected by the performance of certain financial assets that had the best ratings
Summary
The information extracted from the changed notes has been an appropriate issue in recent years. Our study expresses the impact of changes in sovereign credit ratings on the liquidity of financial markets in emerging economies, mainly during the sovereign debt crisis.
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