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DCC-GARCH-model for identifying long-term and short-term effects of financial contagion in response to the credit rating updates
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DCC-GARCH-model for identifying long-term and short-term effects of financial contagion in response to the credit rating updates
Annotation
PII
S042473880014080-7-
DOI
10.31857/S042473880014080-7
Publication type
Article
Status
Published
Authors
Natalia Pivnickaya 
Affiliation: National Research University Higher School of Economics
Address: Moscow, Russian Federation
Tamara Teplova
Affiliation: National Research University Higher School of Economics
Address: Russian Federation
Edition
Volume 57 Issue 1
Pages
113-123
Abstract

Abstract. Our research investigates the impact of potential and actual changes in the sovereign credit ratings on the “contagion effects” in developing financial markets of the Asian region (9 countries). The paper analyzes both long-term and one-day cross-border market reactions. The time horizon of the data sample is from 2000 to 2020. Advantages of the DCC-GARCH-model for adequately accounting for the behavior of financial data are shown. We have found that the impact of ratings and outlooks is stronger in the long term than in the short term. We identified pairs of countries with greatest “contagion effects” as the reaction to sovereign ratings updates. Taiwan is an important reference point for investors in the Asian region. The downgrade of its sovereign rating is a signal for a general deterioration of the investment environment in the region and primarily has a negative effect on the countries with the lowest credit ratings: Indonesia, Philippines and India. Extrapolation of sovereign rating information updates strongly expressed in the “China-Hong Kong” pair in both directions. In addition, we characterized the features of transmission processes with positive and negative effects. We found that in the case of a negative contagion effect, when there is an extrapolation of reactions to a potential or actual deterioration in a country's credit quality outside its borders, investors tend to have stronger reaction towards one of the contagion factors: rating or outlook. When a potential or actual improvement in a country's credit quality is perceived as a signal for an improvement in another country, the strength of the influence of the rating and outlook has a positive relationship: the stronger (weaker) the influence of the rating, the stronger (weaker) the influence of the outlook.

Keywords
Keywords: contagion effect on financial markets, emerging financial markets, sovereign ratings, DCC-GARCH.
Received
25.03.2021
Date of publication
29.03.2021
Number of purchasers
24
Views
1240
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0.0 (0 votes)
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S042473880014080-7-1 Дата внесения правок в статью - 02.03.2021
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References

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