Do sovereign credit ratings influence regional stock and bond market interdependencies in emerging countries?

We investigate the permanent and transitory effects of sovereign credit ratings on time-varying stock and bond market correlations with their respective regional markets for a sample of up to nineteen emerging countries over the period from 1 January 1994 to 1 July 2007. We find that stock and bond market co-movements within a region respond heterogeneously to sovereign ratings information. Sovereign ratings and outlooks tend to be positively related to regional stock market co-movements suggesting that there are positive rating spillover effects whereby upgrades provide common benefits for neighboring countries in the region, however downgrades would lead to investors shifting funds from the downgraded market into the surrounding region. In contrast, sovereign rating and outlooks tend to be negatively related to regional bond market co-movements suggesting the existence of contagion during periods of ratings and outlook downgrades (negative rating spillover effects). We find the negative influence is concentrated in the countries that have higher foreign currency debt ratings than the regional average. (C) 2012 Elsevier B.V. All rights reserved.