ABSTRACT
Sovereign credit ratings provide publicly available information on a national government’s ability and willingness to service its debts in full and in a timely manner and are primarily determined by a country’s economic fundamentals (see Cantor and Packer, 1996; Afonso, 2003). To date, the full extent of the impacts of agency ratings in the fi nancial system are not well understood. is chapter complements existing studies and adds a signifi cantly new dimension to the academic literature on rating impacts in international fi nancial markets. While the signifi cant impacts of sovereign credit ratings on stock and debt market returns are established in the ratings literature (see inter alia Cantor and Packer, 1996; Kaminsky and Schmukler, 1999, 2002; Reisen and Von Maltzan, 1999;
Brooks et al., 2004; Gande and Parsely, 2005; Ferreira and Gama, 2007; Pukthuanthong-Le et al., 2007), the eff ects on the skewness of asset returns and currency markets have never been explicitly examined. News on sovereign debt ratings may aff ect both stock and currency markets as ratings information provide signals on future economic conditions within a rated country and a rating change may cause the national government to implement policies that aff ect companies’ future cash fl ows, thereby aff ecting stock returns as well as aff ecting general investor confi dence and buying and selling pressures on the countries’ currency. Furthermore, as the asymmetric and spillover eff ects of ratings are established in the extant literature (Reisen and Von Maltzan, 1999; Brooks et al., 2004; Gande and Parsely, 2005; Ferreira and Gama, 2007), it is only natural to examine whether there are also asymmetries and spillovers in the rating impacts on higher moments of stock and currency market returns.
