Abstract
This paper investigates the asymmetric effects of upgrade and downgrade of the sovereign credit rating on regional interdependence of seven emerging stock markets in the Asian Pacific Area. Firstly, by comparing the cross-country correlation matrices of stock market index returns on event days and none event days, we find out increases in correlations in both upgrade and downgrade rating days but the frequency of decreasing correlations is significantly higher in downgrade rating days. Secondly, with a regression analysis taking advantage of time-varying conditional correlations of each stock market index with regional market index, we discover a significant increase in the correlations of most countries because of the common information effect triggered by the upgrade rating events, while for the downgrade rating events, dominant differential information effect results in decrease in the correlations. Moreover, in terms of effects of changes on sovereign ratings from other regional countries, downgrade rating events are more influential. Lastly, we apply an Error Correction Model and discern a significant long-run effect caused by the changes on the sovereign credit ratings and significant short-run transitory effect only exists in the Thailand stock market, the source of Asian Financial Crisis, which supports the financial contagion theory.
Highlights
By comparing the crosscountry correlation matrices of stock market index returns on event days and none event days, we find out increases in correlations in both upgrade and downgrade rating days but the frequency of decreasing correlations is significantly higher in downgrade rating days
With a regression analysis taking advantage of time-varying conditional correlations of each stock market index with regional market index, we discover a significant increase in the correlations of most countries because of the common information effect triggered by the upgrade rating events, while for the downgrade rating events, dominant differential information effect results in decrease in the correlations
While coefficient of is only significant at the 1% level for Indonesia and at the 10% level for India and South Korea.if we only consider the coefficient of which is significant at the level 1%, we find out that the upgrade rating event increases the correlations of stock market index in Indonesia with respective regional market index
Summary
By investigating impacts of rating adjustments on market premium of stock markets in unadjusted countries, Ferreira and Gama [5] display asymmetric effects of upgrade and downgrade rating events, and geographical proximity and whether countries belonging to developing countries have significant impacts on spillover effect. For international portfolio investors prefer to invest in respective regional markets to reduce asymmetric information and sovereign credit ratings events might as well breed more significant spillover effects among regional countries because of geographical and cultural proximity and belonging to developing countries, this paper investigates effects of ratings events on Hong Kong, Taiwan India, Indonesia, South Korea, Malaysia, Philippine and Thailand on intra-regional interdependence of stock markets.
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