Communication of Credit Rating Agencies and Financial Markets

23 Pages Posted: 24 Jul 2021

Date Written: July 21, 2021

Abstract

The ability of credit rating agencies (CRAs) to influence financial markets has been widely debated in the academic literature, policy circles and general press. While some commentators think that CRAs’ announcements have relevant effects on the markets, others reckon that they may simply follow investor opinion. To address the issue, the empirical literature has mainly employed the event study methodology, analyzing the behavior of financial markets around rating change announcements. Following a recent trend that has emphasized the use of high-frequency data to achieve credible identification in macroeconomics, in this paper, we use the instrumental variable-local projection (IV-LP) methodology to obtain the effect of structural shocks to CRAs’ communication on financial markets. Applying this approach to Mexico, we find that CRAs’ communication about the sovereign has statistically significant effects on CDS spreads, interest rates and the exchange rate.

Keywords: credit rating agencies, financial markets, instrumental variable

JEL Classification: G14, F40

Suggested Citation

Menna, Lorenzo and Tobal, Martín, Communication of Credit Rating Agencies and Financial Markets (July 21, 2021). Available at SSRN: https://ssrn.com/abstract=3891158 or http://dx.doi.org/10.2139/ssrn.3891158

Lorenzo Menna (Contact Author)

Banco de Mexico ( email )

Ave Cinco e Mayo 1
Col. Centro
Mexico City, Mexico DF 06059
Mexico

Martín Tobal

Banco de Mexico ( email )

Ave Cinco de Mayo 1
Col. Centro
Mexico City, Mexico DF 06059
Mexico

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