Transmission process and determinants of sovereign credit contagions: Global evidence

Abstract

This research utilizes an event study to analyze the contagion patterns of sovereign credit ratings among global stock markets. Unlike other extant literature with limited samples, this paper covers 75 markets in the world. The results show that, if event and non-event countries locate in nearby geographic regions and/or have similar levels of economic development, then event countries contagiously communicate the impacts of credit rating changes to non-event countries. Stronger contagion effects appear when the stock markets of event and non-event countries are highly correlated. When event countries dominate the global financial markets, the contagion effects from negative rating shocks result in greater stock market declines for non-event countries. The stock market performances of non-event countries consequently turn down when a chain of negative sovereign credit rating events occurs before the event day regardless of whether an upcoming upgrade or downgrade rating event is announced on the event day. The contagion effects even intensify during financial crisis periods, and an asymmetric effect is also observed.