Sovereign credit rating and contagion effects on financial markets of Asian region

Abstract

This article studies the contagion effects on the emerging financial markets of the Asian region. The contagion effect is manifested in the change of interconnection degree of financial markets after the shock in one of the countries of the region. In the paper, we consider the information on potential or actual change in sovereign credit rating as a shock leading to a contagion effect. Our sample includes evidence from 7 Asian countries covering the period from 2000 to 2018. We use the DCC-GARCH model which allows us to take into account the peculiarities of financial data behavior. We intend to show the effect of inconsistencies in ratings assigned by various agencies on strengthening or weakening the processes of contagion on Asia’s stock markets. We also study the impact of historical inconsistencies between credit rating outlooks and actual rating changes on the level of «trust» to credit outlooks in the future. In assessing the impact of discrepancies we assume that the market remembers recent events better than more distant in time. We were able to confirm the impact of inconsistencies in the ratings given by different rating agencies for China, Hong Kong, and India. In addition, we found that the presence of inconsistencies between the outlooks and actual rating updates in the past tend to weaken the trust regarding positive outlooks rather than negative ones.