Emerging Market Risk and Sovereign Credit Ratings

In principle, the sovereign credit rating industry could help mitigate the congestion externalities common to world capital markets that arise from the failure of market participants to internalise the social cost of external borrowings. This would require that modifications in ratings on government bonds convey new information to market participants, with changes in credit ratings leading to changes in country risk premia. Using panel data analysis and event studies this paper presents econometric evidence that changes in credit rating have a significant impact on international financial markets.