Credit rating announcement and bond liquidity: the case of emerging bond markets.
| Autor | Saadaoui, Amir |
Introduction
The information extracted from the changed notes has been an appropriate issue in recent years. The ratings disclosed by the rating agencies do not contain complete information, being able to help investors. Unlike these agencies, the informational content is disclosed while transferring assessments without providing specific details to the public. Thus, the agencies' actions will have some effects on the market returns and asset prices.
Fridson and Sterling (2006) show that the credit rating agencies will summarize public information and that the changes in bond ratings do not transmit any new information to the market.
Recent studies have shown that negative rating announcements, especially reviews about decommissioning and downgrades, do not actually reflect information relevant to the pricing of shares, bonds and credit default swap (CDS) spreads (Chodnicka-Jaworska, 2017; Wengner et al., 2015). Overall, most of this literature estimates the price and/or returns. In this paper, we have moved further away from the traditional analysis of prices by looking into the effects of the rating agency's announcement on the liquidity of the emerging bond markets.
During recent years, sovereign ratings have been in the interest of research in the sovereign euro-zone, including Greece and Spain have experienced a drop in their ratings by Standard & Poors (S&P) in August 2011 (Andreasen and Valenzuela, 2016). The IMF, in its report of 2010, showed that the sovereign credit risk is one of the main obstacles to global economic stability. Consistent with this, Duggar et al. (2009) have found that 71% of business failures and under-rated sovereigns in the emerging markets have been improving during the sovereign crises.
Recent literature has shown that the changes in the sovereign rating and outlook/watch signals affect equity and emerging debt markets, respectively (Rusike and Alagidede, 2021). Indeed, it has also shown that these effects are not only significant at the national level since sovereign ratings are assigned to affect markets in other countries. In particular, the bad news has a negative effect that the new sovereign rating causes a significant impact on the equity and bond markets of other countries. However, the good news has a negligible effect (e.g. Boninghausen and Zabel, 2015). Banier and Hirsch (2010) have shown that these instruments were valued for providing a considerable economic benefit. Vazza et al. (2005) have analysed the behaviour of ratings of assets issued by companies and found that these issues have a higher probability of a rating change in the direction indicated.
In fact, Alsakka and Ap Gwilym (2009) have analysed the dynamics of the sovereign ratings for six rating agencies in the emerging economies, including status monitoring. They observed that the assets placed under surveillance have a higher probability of a rating change in the direction indicated by the status within 12 months after being placed on the watch list. Several studies prove that the sovereign ratings represent approximations of the ability and willingness of governments to highly regard their financial conditions. They also substantiate that these ratings capture the dynamics of capital markets and influence the capital cost.
Brooks et al. (2004) point out that the degradations of sovereign asset ratings have a large negative effect on the stock markets. Gande and Parsley (2005) and Ferreira and Gama (2007) reveal that the degradations of sovereign bond ratings--mainly during times of crisis--aggregate stock returns of other countries, especially in the emerging economies and neighbouring countries, while the progressions of ratings have a ridiculous impact. Ismailescu and Kazemi (2010) and Sovbetov and Saka (2018) have studied the relationship between CDS of the emerging markets and changes in sovereign notation and found that the spread of CDS responds to changes in sovereign ratings. These authors have also evinced that the positive signals add new information on markets, against the negative news which is expected, and therefore reflected in CDS spreads. These results are contradictory to those found in the previous studies having stated that the negative signals of negative ratings have more effect on CDS spreads. For instance, Norden and Weber (2004) and Salvador (2017) mention that the negative signals greatly expand CDS spreads for issuers of investment grade, while the strong positive signals significantly expand CDS spreads for speculative-grade issuers.
Similarly, Sovbetov and Saka (2018) have studied the interaction between credit risk swaps and domestic stock indexes. It has shown that any increase in the CDS entails a reduction in the stock market index in the short and long terms, respectively, and vice versa. In fact, he also found that the stock market index and the CDS deviate too much and converge towards a long-term equilibrium at a moderate monthly rate.
Owing to the role of credit rating agencies in the sovereign debt crisis in the financial phase (2007-2008) of the current crisis, as in the Asian crisis of 1997, many criticisms are made due to the sovereign debt crisis, notably from investors affected by the performance of certain financial assets having the best ratings. For structured products, lots of tranches rated AAA has thus experienced large losses because of the shortcomings of the methodology of some agencies. Since the beginning of the public debt crisis, a variety of questions about the practices of these agencies have been raised. They focus mainly on the amplifying effects of their decisions, and even on their legitimacy to record sovereign debts (Alsakka et al., 2014).
Several proposals have been made to address the above-mentioned problems, especially in Europe, where the sovereign debt crisis has been aggravated by the accentuation of ratings on certain economic trends such as the indebtedness of Member States.
This study first directly tests the information content of bond rating announcements and their effect on bond market liquidity.
Next, it investigates the impact of rating changes on sovereign bond liquidity around the rating announcements. Rating changes can affect the sovereign bond price, trading and liquidity around the announcement date. In particular, the rating changes that move the bonds out of the investment-grade category can elicit selling pressure or even fire sales of the fallen angels.
To meet our objectives, our study expresses the impact of changes in sovereign credit ratings on the liquidity of financial markets in emerging economies, mainly during the sovereign debt crisis.
The rest of the paper is organized as follows. Section 2 reviews the relevant literature. Section 3 discusses the data and methodology. Section 4 presents the empirical results, and section 5 concludes the paper.
Literature review
Generally, the role of rating agencies, as expressed by the new notes, could be a factor in the price volatility of sovereign bonds (Voorhees, 2011). The rating is considered as a new information transmission channel on the market since it reduces the information asymmetry so that asset prices in the market are moving in the direction of the appreciation expressed (Pagano and Volpin, 2010; Deb et al., 2011; Freixas and Laux, 2012).
Recent literature has shown that the role of rating agencies is to provide information on the market through the publication of a note attributed to the situation of an investor (e.g. Deb et al., 2011; De Haan and Amtenbrink, 2011; Schroeter, 2011).
Actually, Deb et al. (2011) demonstrated that the information extracted from the assigned ratings could affect the future behaviour of the sovereign issuer whose choice of economic and financial policies can be either confirmed or amended according to the rating, whether positive or negative. The area of credit rating has increased in line with the regulations of supply and demand (He and Xiong, 2012). According to De Haan and Amtenbrink (2011) and Schroeter (2011), this process has addressed more than 150 rating agencies that are widespread all over the world. They think that about 140 agencies are in one country and/or in one oriented sector, while around five to ten ones based in Japan, the USA and Canada provide new assessments whether as a country or industry. The global market is dominated by three major agencies, which are S&P, Moody's and Fitch. These agencies are dominant in the market with an estimated share of 40% each to S&P, Moody's and Fitch 15%. In addition, the number of issuers rated by S&P increased from 1,386 in 1981 to 5,860 in 2009, with a significant increase in revenues. The emergence of new notes is carried away by the strong investor demand in the financial markets for information about issuers of shares and bonds. Schroeter (2011) shows that the novella score gives new information about the issuer of the bond, and the likelihood that the issuer can face these engagements.
The ratings of sovereign debt by the rating agencies are considered as assessments of the default probability of the public debt. Indeed, these agencies use economic and political factors to make a qualitative and quantitative assessment of the asset. Through this process, the change in the rating sovereign debt may give new information on the financial situation of a country, requiring considerable externalities to the private sector of the country, which can appropriate the investors to keep the assets.
The effect of the sovereign rating actions on the financial market Sovereign ratings are the ratings of the ability and willingness of governments to meet their financial markets (Gusdinar and Koesrindartoto, 2014). These ratings affect the dynamics of capital markets and affect the cost of capital. Brooks et al. (2004) show that the degradation of ratings has a negative effect on the stock markets.
Gande and Parsley (2005) and Ferreira and Gamma (2007) show...
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