Sovereign rating changes and financial markets during the Asian crisis

This paper focuses on the sovereign rating changes in Asian crisis countries during the Asian crisis and investigates if the change in sovereign credit ratings could affect financial markets using a panel regression. To check if these effects work only in crisis period, the results of crisis period are compared with those in tranquil period.; This paper finds strong evidence of own country effects in crisis period but insignificant result in tranquil period. These results correspond to previous studies which emphasized the asymmetric response between upgrades and downgrades because rating changes during the Asian crisis are mostly downgrades while upgrades in tranquil period.; In addition, the foreign country effects on Asian countries as well as Latin countries in spread and stock markets are also found. These foreign country effects can be explained by wake up call effect which describes the channel of contagion as the shift in market sentiment.; One more interesting finding is that the downgrade news about Asian debtor countries affected the foreign creditor banks. Finally, it is found that the relationship between international interest rates and Asian countries asset prices is not consistent with the traditional view in both crisis and tranquil period. However, relative to the crisis period, the degree of deviation from traditional view diminishes in tranquil period.; In conclusion, this paper proves that credit rating agencies have the power to influence the financial markets especially during a crisis period. This implies that the responsibility of credit rating agencies to increase the accuracy in assessing sovereign rating should be emphasized more.