آیا رتبه بندی اعتباری اوراق قرضه دولتی، سهام منطقه ای و وابستگی های بازار اوراق قرضه در کشورهای نوظهور را تحت تأثیر قرار می دهد؟

We investigate the permanent and transitory effects of sovereign credit ratings on time-varying stock and bond market correlations with their respective regional markets for a sample of up to nineteen emerging countries over the period from 1 January 1994 to 1 July 2007. We find that stock and bond market co-movements within a region respond heterogeneously to sovereign ratings information. Sovereign ratings and outlooks tend to be positively related to regional stock market co-movements suggesting that there are positive rating spillover effects whereby upgrades provide common benefits for neighboring countries in the region, however downgrades would lead to investors shifting funds from the downgraded market into the surrounding region. In contrast, sovereign rating and outlooks tend to be negatively related to regional bond market co-movements suggesting the existence of contagion during periods of ratings and outlook downgrades (negative rating spillover effects). We find the negative influence is concentrated in the countries that have higher foreign currency debt ratings than the regional average.

Throughout recent decades, sovereign credit ratings and their influential roles in both encouraging and potentially destabilizing investment flows into emerging markets have amassed considerable interest, particularly in light of their delayed revisions that intensified various currency crises in the 1990s and early 2000s. These ratings provided by credit rating agencies reflect the capacity and willingness of sovereign obligors to meet their debt service payments and are based on a broad range of criteria which includes, among other considerations, economic performance, loan default history and political factors. By encapsulating a wide range of factors, these credit risk assessments have been identified as crucial tools for evaluating investment opportunities in emerging markets where problems of asymmetric information can be severe. As a result, the literature aiming to gauge the impacts of sovereign ratings on asset returns has proliferated with the main empirical findings supporting the notion that they significantly influence overall capital flows into stock and bond markets (see Brooks et al., 2004, Cantor and Packer, 1996, Reisen and von Maltzan, 1999, Reinhart and Rogoff, 2004 and Kim and Wu, 2008). A remarkable feature of these capital flows is that asset returns in neighboring emerging markets are often observed to move in tandem. This is evident in the numerous episodes of financial crises in the recent past, in which sharp capital movements led to substantial devaluations in stock and bond investments not only in the epicenters of the crises but also surrounding countries in the nearby region.1 These simultaneous and powerful financial shocks have highlighted the existence of a regional transmission channel through which both information and capitals flow. In the extant literature, strong neighborhood effects are documented and contagion is known to be regional rather than global in nature (Glick and Rose, 1999). This aspect has important implications for investors’ portfolio allocation decisions and for policy makers who are entrusted to regulate and to maintain the stability of international financial systems. For these reasons, focus needs to be placed on monitoring how an emerging market's stock and bond capital flows co-move with those of the overall region and more importantly, to understand what factors significantly influence these patterns. To date, research on the nature of asset interdependence has been mostly confined to measuring the level of national stock or bond market co-movements with the world market in order to uncover signs that countries are becoming globally interdependent (see Bekaert and Harvey, 1995, Bekaert and Harvey, 2003, Bekaert et al., 2009 and Bracker et al., 1999). Most studies in the literature have been primarily motivated to investigate the contagious effects of financial crises that increased financial linkages in asset returns across geographically proximate nations (see Baig and Goldfajn, 1999, Hernandez and Valdez, 2001, Kaminsky and Reinhart, 1999 and Kaminsky and Schmukler, 2002). By measuring the short-term stock or bond market co-movements between neighboring emerging markets, the bulk of existing evidence supports strong contagion and/or negative rating spillover effects during times of financial distress (Ferreira and Gama, 2007, Gande and Parsley, 2005 and Kaminsky and Schmukler, 2002). For example, Baig and Goldfajn (1999) find that co-movements in sovereign bond spreads and stock returns across pairs of South-East Asian countries significantly increased during periods of financial crises. Given the established evidence of sovereign rating impacts on individual country asset flows, we conjecture that they contain significant informational value that can influence regional asset co-movements. Thus, our aim in this paper is to merge the two prominent strands of literature on sovereign ratings and asset co-movements to determine whether an explicit relationship exists between the two. To the best of our knowledge, the nature of this potential linkage has yet to be fully explored. Our research question is: How do sovereign ratings affect an emerging country's stock and bond market interdependence with its corresponding region in both the short- and long-term? The ratings literature has not previously differentiated between the long-term and transitory impacts of sovereign credit ratings and is missing such a comprehensive study of emerging markets’ asset return co-movements. Moreover, there are few studies comparing the effects of sovereign credit ratings in both stock and bond markets (besides Pukthuanthong-Le et al., 2007 and Kaminsky and Schmukler, 2002). While it has been documented that rating events in one country has significant spillover effects for other international bond and stock markets in the short-term (see Gande and Parsley, 2005 and Ferreira and Gama, 2007, respectively), it is not clear how they may impact on a country's intra-regional stock and bond market interdependencies over different time-frames. Our work is the closest to that of Chiang et al. (2007) who find that for nine Asian countries during the Asian Financial Crisis, changes in their foreign currency sovereign ratings were significantly related to their pair-wise cross-stock market correlations. Our research first differentiates itself by addressing the shortfall in current understanding between intra-regional market linkages over different time horizons and sovereign credit rating revisions. Secondly, we provide some economic interpretations on why there are cross-country differences in the effects of sovereign ratings information on intra-regional stock and bond market return interdependencies. By employing a dataset of nineteen emerging countries over a recent pre-Global Financial Crisis sample period from 1 January 1994 to 1 July 2007, we conduct extensive empirical analyses on the transitory and long-run effects of sovereign ratings information on emerging stock and bond market interdependence with their respective regional indices. We report a number of findings that add fresh insights to the literature. First, we find that while sovereign ratings provided by external rating agencies like Standard and Poors (S&P) significantly influence emerging stock and bond market co-movements with their respective regional indices in the long-run, there is little evidence of destabilizing effects imparted across the board in the short-run. We report a heterogeneous response between stock and bond markets to sovereign credit ratings information. Second, there is mostly a positive association between sovereign ratings and outlooks and regional stock return co-movements. This suggests that equity investors consider ‘good news’ relating to an individual country as providing a common positive regional investment climate leading to beneficial investment flows to other countries in the region and hence, higher positive return correlations. However, ‘bad news’ is regarded as country-specific assessments and investors react by shifting funds from the downgraded market into the surrounding region leading to a lower return correlation. Third, in contrast to the stock market investigation results, we find there are relatively more negative relationships between outlooks and regional bond market co-movements. This indicates that when ratings and outlooks are downgraded, bond investors in the country may be inclined to withdraw funds from the surrounding markets in the region as well as from the downgraded bond market itself causing its regional market co-movement to rise. However, upgrades are seen as country-specific credit condition improvements drawing inflows from surrounding markets and hence, lowering intra-regional correlations. Good public debt management and economic strength appears to make a difference in the effects of sovereign ratings information across countries. We argue that the differential relationship between sovereign credit rating downgrades and intra-regional return correlations in stock and bond markets is largely due to a common lender effect in debt markets. These results hold important implications for international portfolio investors and market regulators alike. For those countries with differential credit conditions to their regional counterparts, we reveal a decoupling–recoupling effect from their rating events. Rating upgrades are viewed as country-specific news that cause these countries to decouple from their own region while downgrades work to recouple the countries with their neighboring countries. Overall, we contribute a new regional perspective to the literature on the financial market impacts of sovereign ratings by comprehensively examining both the permanent and transitory effects on asset return correlations and we distinguish the effects for stock vs. bond markets. This is an important contribution to current knowledge as financial crises tend to be regional in nature (case in point being the Asian Financial Crisis, Argentine debt crisis and most recently, the European debt crisis) so understanding the effect of ratings activity on intra-regional asset comovements over not only the short but also long-term enables improved guidance for policy makers and investors in mitigating the amplification of present and future financial crises. Our finding of a largely positive impact of sovereign ratings information on stock market comovements and an opposing negative influence on bond market comovements has very important policy implications in terms of how policy makers would need to design different policies to improve regional integration in the two types of financial markets. Fundamental changes in the credit quality of sovereign nations do not have the same integrative forces for stock and bond markets within the same region. Furthermore, our finding that higher rated countries have a tendency to decouple from the regional bond markets would have important policy implications considering the current sovereign debt crisis in Europe. That is, those with below average ratings in the region would experience higher intra-regional correlations as their ratings are cut, whereas those with above average ratings would decouple from the region as their ratings improve. The rest of this paper is organized as follows. Section 2 outlines the data that will be used in our analyses. Section 3 will present the approach used to generate and model the various asset co-movements for the emerging markets in our sample. In Section 4 we discuss the results of our main analysis. Lastly, in Section 5 we conclude this paper by summarizing our main findings and we highlight their implications.

Sovereign credit ratings have become an integral part of macroprudential regulation and internal industry guidelines and as such plays a pivotal role for emerging market investments. Research over the last decade has confirmed this fact by providing strong empirical evidence indicating sovereign ratings serve the function of enhancing the transparency of an emerging market's credit risk profile and therefore can significantly influence its national stock and bond market investment flows. However, while the impacts of these credit assessments on stock and bond markets have been identified, there is a lack of understanding on their specific role on the interdependencies between financial markets. Given the apparent linkages in stock and bond investment flows across national markets from the same region, most evidently during the numerous financial crises of the 1990s and early 2000s, it is surprising that a thorough investigation on the role of sovereign ratings in determining these asset co-movements is missing from the current literature. The primary objective of this paper has been to address this particular oversight in the literature. Specifically, we conduct various analyses to measure the impact of sovereign ratings on an emerging market's: (1) stock market co-movement with its corresponding regional stock market index, and (2) bond market co-movement with its corresponding regional bond market index. We find heterogeneous rating spillover effects in these two key asset markets. The major results of this paper are as follows. First, we report a fundamental difference in the effects of sovereign ratings information on both stock and bond market interdependence over different time-frames. Asset correlations are much more strongly linked to ratings and outlooks in the long-run than in the short-run. Second, in the long-run we observe predominantly positive regional rating spillover effects of sovereign ratings and outlooks onto stock market co-movements. This implies that ratings and outlook improvements lead to higher returns not only in the affected country but also in the countries surrounding it. This is the case if foreign investors view the stock markets in a region as having common characteristics. On the other hand during the periods of downgrades, international equity investors tend to shift funds away from the affected stock market in favor of other stock markets in the region. Third, we report a predominantly negative regional rating spillover effect of ratings and outlook onto bond market co-movements. This suggests that when ratings and outlooks are revised downwards, investors in the country may be inclined to withdraw funds from the surrounding regional markets as well as the downgraded market, causing its regional bond market co-movement to rise. However, when there is a sovereign credit improvement, international bond investors shift funds away from other bond markets in the region in favor of the affected market and this leads to a fall in regional correlations. In addition, we find the negative influence is concentrated in the countries that have higher foreign currency debt ratings than the regional average. This suggests that in better rated countries, bond markets tend to decouple from their regional counterparts when their ratings improve as investors react by concentrating their regional investments into these regional leaders. Consistent with existing ratings studies, we find that credit outlooks have greater market impact than actual ratings in the short-term. The differential response of bond market correlations to sovereign credit ratings is consistent with the existence of a common lender effect in debt markets during financial crises. There are important implications for portfolio management in these findings as we reveal that stock and bond markets respond heterogeneously to sovereign ratings. We infer that downward rating and outlook revisions work to increase diversification potential in regional stock portfolios in emerging countries while outlook and rating downgrades serve to reduce diversification opportunities in regional bond portfolios. Importantly, we find that rating downgrades do enhance international bond market linkages and potentially fuel episodes of financial contagion. Thus, rating agencies need to monitor developments in the countries they are rating and revise as necessary in a timely manner so as not to exacerbate the pro-cyclical effects of sovereign ratings in international debt markets. As our empirical results strongly suggest that ratings information have primarily a long run impact on intra-regional asset correlations, we conjecture that the recent downgrades in sovereign ratings, for countries facing fiscal problems in Europe (some were downgraded from AAA over the period 2010–2012 – e.g., Austria, France and Spain) and even the United States in the fallout from the Global Financial Crisis, will cause the downgraded countries’ stock markets to under perform and decouple from their regional counterparts for some time and the sovereign debt markets within an affected region will conversely become highly correlated as is the case in Europe presently. We contribute a new regional perspective to the literature on the financial market impacts of sovereign ratings by examining both the permanent and transitory effects on asset return correlations and identify clearly differential effects for stock and bond markets. An important direction of further research is to investigate the long term impacts of the European sovereign debt crisis (2011+) led rating spillover effects on asset correlations. However, we leave this as future research until relevant data becomes available.