The Reaction And Cross-market Effect Between Bond And CDS Market To Sovereign Credit Rating Downgrades

After the global financial crisis in 2009,the world's economy has gradually recovered.But sovereign credit ratings of emerging market countries have been frequently downgraded since 2013.Against the backdrop of financial globalization,large amounts of investments started to divert from developed countries to emerging market countries due to the influence of financial crisis.When ratings are downgraded,the prices of emerging market bonds and CDS fluctuate violently,resulting in a record high bond yields and fluctuating CDS prices.Whether CDS can guarantee the functioning of bond market is worth thinking.This thesis analyses the impact of sovereign credit ratings on bond and CDS as well as their cross-market effect.This will be helpful for the research of financial stability and risk prevention.Many foreign scholars began to analyze the influence of frequent downgrading of emerging market countries' sovereign credit ratings on bond market since the financial crisis,and they have some achievements.But there are few studies on the similarities and differences between the bond and CDS markets and the impact of cross-market effects.In emerging market economies including the BRICS countries,bonds and CDS are two important components of their bond markets.Given differences in their CDS protection on bond,they have different reactions in the face of sovereign risk.Using related theories,methods and econometric model,this thesis made empirical research on the impact of emerging market countries' sovereign credit ratings downgrading on bond market.And this thesis also analyzed the cross-market effect between the two markets.First,this event-based thesis analyzed the impact of frequent downgrading of emerging market countries' sovereign credit ratings on bond market in the short term.The results of the empirical research show that there is a significant upward trend in the bond market of the emerging market countries when the sovereign credit rating is downgraded,while the bond yields have not changed significantly in advance.In brief,the downgrading of the credit rating has a short-term impact on the bond market.the thesis factored in CDS.According to event-based empirical research,CDS has no obvious response to the event in the short window period.Then the author made a chi-square distribution test.Second,based on this,the author analyzed cross-market effects between the two markets and made a comparison between the bond market and the CDS market in its reaction within the 60 days before the downgrading.The research found that CDS and bonds of investment-grade countries have the same trend of change before and after the downgrading.This shows that there may be a risk of infection in these two markets.As for speculative-grade countries,the trend of the two markets is the same two months before the downgrading,and the change in the two markets is the opposite trend within one month after the downgrading.That means there may be investment diversion between the two markets.And the next chapter will analyze cross-market effects between the two markets.Finally,the thesis used Copula model and divided emerging market countries into investment-grade countries and speculative-grade countries.Using Copula model,the thesis analyzed the cross-market effect of the CDS and the bond markets before and after the credit rating downgrading and the effect in stable period.The results show that the cross-market effect between the two markets is always risk infection and the infection even aggravated after the downgrading.This means people will continue to increase the purchase of CDS of high credit rating countries to avoid guard against sovereign risk.And there is risk infection before the downgrading and investment diversion after the downgrading.That means investors have low confidence in CDS of low credit rating countries and would decrease the purchase of it after the downgrading.