Sovereign Credit Rating Downgrade The Impact Of The Host Country The Capital Market Risk And Prevention Research

Since21st century, the acceleration of economic globalization, the rapiddevelopment of financial markets and more convenient environment of capital flows, allthese create convenient conditions for cross-border lending of sovereign states.Sovereign debt crisis has also become more serious. In2009, rating agencies continuedto drop Greece’s sovereign credit rating, Greece’s sovereign debt crisis broke out. OtherEuropean countries’ sovereign debt security is also widespread concerned by investors,ultimately resulting in the full-blown debt crisis in Europe. Up to now, Europeancountries are still in deep debt crisis quagmire. Rating agency lowered Americansovereign credit rating in2011. All these made sovereign debt problems become thefocus of world attention.Review of European sovereign debt crisis and the U.S. downgrade events, thedowngraded report released by the rating agencies not only makes the government’sforeign debt market turmoil, but also led to rating downgrade countries’ stocks, bondsmarket volatility, impacting economic and financial market stability of these countriesseriously.Based on these realistic backgrounds, this paper studies the impact of sovereigncredit rating changes to the host country’s capital market, especially the impact risk ofdowngrade to this market. According to the sources of capital, this article will separatethe capital market into international capital inflows and domestic capital markets.First we test the relation of the sovereign credit rating changes and three mainforms of international capital (FDI, international portfolio investment and internationalbanking loans), centre on analyzing the impact risks of downgrade on theinternational capital outflow.Secondly, the subject of sovereign credit ratings is the solvency and willingness ofsovereign governments, not directly related with the host country’s domestic capitalmarket. And compared to international investors, the information asymmetry faced byinvestors of the domestic capital market is weak. Therefore, by examining the impact ofrating changes on the domestic capital market, not only able to explain the information content of ratings, but also declare the breadth of the sovereign credit rating downgradeimpact and the importance of risk prevention.Based on the impact risk of sovereign credit rating downgrade, starting from theinfluencing factors of rating, this paper uses an econometric approach to mining themain factors form those influencing factors, isolates and testes the short-term andlong-term effects of these factors. And thereby we propose the long-term policy tomaintain and enhance the rating scale and short-term control policies to discourageshort-term non-normal impact.Finally, based on the short-term impact of sovereign credit rating factors, weestablish an early warning model to prevent sovereign credit downgrade risks, ensurethe stable and healthy development of capital markets.