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THE WORLD BANK ECONOMIC REVIEW, VOL. 16, NO. 2, 171-195
© 2002 International Bank for Reconstruction and Development / The World Bank

Financial Crises, Credit Ratings, and Bank Failures

Emerging Market Instability: Do Sovereign Ratings Affect Country Risk and Stock Returns?

Graciela Kaminsky and Sergio L. Schmukler

Graciela Kaminsky is with George Washington University. Her e-mail address is graciela{at}gwu.edu.
Sergio Schmukler is with the Development Research Group at the World Bank. His e-mail address is sschmukler{at}worldbank.org.

Abstract

Changes in sovereign debt ratings and outlooks affect financial markets in emerging economies. They affect not only the instrument being rated (bonds) but also stocks. They directly impact the markets of the countries rated and generate cross-country contagion. The effects of rating and outlook changes are stronger during crises, in nontransparent economies, and in neighboring countries. Upgrades tend to take place during market rallies, whereas downgrades occur during downturns, providing support to the idea that credit rating agencies contribute to the instability in emerging financial markets.


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