Abstract
We use an EGARCH model and a fixed effects panel regression to investigate the reaction of emerging market stock and bond volatility to sovereign credit ratings changes. The daily data covers the period of 1990–2016 and includes time periods of emerging market crises. The results are divided between their effect on stock and on bond volatility. The estimations provide evidence of an asymmetric effect of rating changes on stock volatility. Downgrades have a significant impact on stock volatility, while upgrades have no such effect. For bonds the effect on volatility is ambiguous with both upgrades and downgrades having an effect. Furthermore, downgrades increase both stock and bond market volatility.
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