Emawtee Bissoondoyal-Bheenick

An analysis of the determinants of bank ratings: comparison across ratings agencies

The recent Global Financial Crisis has focused our attention on the integrity of rating agencies. Often condemned for being too slow to act, rating agencies have been blamed during many financial crises. This impression opens some research questions addressed in this paper. What are the determinants of banks ratings? How do they differ across ratings agencies? This paper analyses the quantitative determinants of bank ratings, provided by Standard & Poor’s, Moody’s, and Fitch in the United Kingdom and Australia. The main finding is that quantitative factors that reflect asset quality, liquidity risk, capital adequacy and operating performance are the key determinants of bank ratings across the rating agencies. However, macroeconomic variables and market risk factors do not seem to be contributing factors in explaining bank ratings in either country.

Alternative beta risk estimators in cases of extreme thin trading: Canadian evidence

In this paper, an alternative method of estimating the systematic risk for Canadian stocks is presented and empirically investigated. The method proposed is applied to a set of data impacted by censoring – the presence of zero returns, which occurs in extreme cases of thin trading. The approach used is the sample selectivity model, which is a two-step procedure: with a selectivity component and a regression component. In addition, this study compares the new beta estimate to the standard OLS beta and the Dimson Beta. The results indicate that the selectivity-corrected beta does correct the downward bias of the OLS estimates and possesses desirable statistical properties.

Sovereign rating changes and realized volatility in Asian foreign exchange markets during the Asian crisis

This article explores the impacts of sovereign rating changes by multiple rating agencies on foreign exchange rate volatility during the Asian crisis. We extend the existing literature to explore the impacts of multiple agency sovereign rating changes on the realized volatility of foreign exchange markets. Our findings show that the rating downgrades are associated with increases in foreign exchange volatility, and that multiple downgrades lead to a much higher increase in volatility as compared to single downgrades. Our results demonstrate that rating downgrades are part of the important news for the national markets consistent with the analysis of contagion analysis in Baur and Fry (2006, 2009).

Volatility Spillover between the US, Chinese and Australian Stock Markets

We assess the stock market volatility spillover between three closely related countries, the United States, China and Australia. This study considers industry data and hence provides a clear idea of the channels through which volatility is transmitted across these countries. We find that there is significant bilateral causality between the countries at the market index level and across most of the industries for the full sample period from July 2007 to May 2016. There is one-way volatility spillover from the United States to China in the financial services, industrials, consumer discretionary and utilities industry. There is insignificant volatility spillover from the Australian to Chinese stock markets in financial services, telecommunications and energy industries. Once we remove the effect of the global financial crisis (GFC), we find significant bilateral relationship across all of the industries across the three countries. JEL Classification: G15

Classifying Chinese bull and bear markets: indices and individual stocks

Purpose This paper aims to investigate Chinese bull and bear markets. The Chinese stock market has experienced a long period of bear cycle from early 2000 until 2006, and then it fluctuated greatly until 2010. However, the cyclical behaviour of stock markets during this period is less well established. This paper aims to answer the question why the Chinese stock market experienced a long duration of bear market and what factors would have impacted this cyclical behaviour. Design/methodology/approach By comparing the intervals of bull and bear markets between stocks and indices based on a Markov switching model, this paper examines whether different industries or A- and B-share markets could lead to different stock market cyclical behaviour and whether firm size can determine the relationship between the firm stock cycles on the market cycles. Findings This paper finds a high degree of overlapping of bear cycles between stocks and indices and a high level of overlapping between the bear market and a fraction of stock with increasing stock prices. This leads to the conclusion that the stock performance and trading behaviour are widely diversified. Furthermore, the paper finds that the same industry may have different overlapping intervals of bull or bear cycles in the Shanghai and Shenzhen stock markets. Firms with different sizes could have different overlapping intervals with bull or bear cycles. Originality/value This paper fills the literature gap by establishing the cyclical behaviour of stock markets.

Realized Volatility of the Spread: An Analysis in the Foreign Exchange Market

This chapter investigates the determinants of the volatility of spread in the over-the-counter foreign exchange market and examines whether the relationships differ in the crisis periods. We compute the measures for the volatility of liquidity by using bid-ask spread data sampled at a high frequency of five minutes. By examining 11 currencies over a 13-year sample period, we utilize a balanced dynamic panel regression to investigate whether the risk associated with the currencies quoted or trading activity affects the variability of liquidity provision in the FX market and examine whether the crisis periods have any effect. We find that both the level of spread and volatility of spread increases during the crisis periods for the currencies of emerging countries. In addition, we find increases in risks associated with the currencies proxied by realized volatility during the crisis periods. We also show risks associated with the currency are the major determinants of the variability of liquidity and that these relationships strengthen during periods of uncertainty. First, we develop measures to capture the variability of liquidity. Our measures to capture the variability of liquidity are non-parametric and model-free variable. Second, we contribute to the debate of whether variability of liquidity is adverse to market participants by examining what drives the variability of liquidity. Finally, we analyze seven crisis periods, allowing us to document the effect of the crises on determinants of variability of liquidity over time.

Relative Bias in Sovereign Credit Risk Spill-over to Domestic Firms

In this paper, we investigate the spill-over of sovereign rating changes into the corporate sector across 34 countries, with a primary focus on the relative effects of positive and negative events. Positive or negative bias of such spill-overs could impact the relative speed and depth of recessions versus recoveries. We find that such bias varies across countries. Our results also show considerable variation in total (positive and negative) spill-over; the spill-over rates can partly be explained by firm and sovereign level characteristics, with firms rated at parity with the sovereign particularly affected by both positive and negative spill-over in both investment and sub-investment grade rated sovereigns.

Stock Market Impact of Sovereign Rating Changes: Alternative Benchmark Models

Given the current state of the world capital markets, more emphasis is being placed on the growing importance of credit rating agencies in providing standardised assessment of credit risk. One of the main applications of credit ratings is to assess the risk exposure of a national market. Sovereign credit ratings often serve as a ceiling for private sector ratings of any given country, which stretches their influence far beyond government securities. The change of sovereign ratings is one of the key factors that may trigger re-weighting of the portfolios held. One component of the literature assesses the national stock market impact of sovereign ratings changes (see for example Brooks, Faff, Hillier, & Hillier 2004; Pukthuanthong-Le, Elayan, & Rose 2007; Ferreira & Gama, 2007). Most of the studies in this area have used an event study methodology to assess the impact of sovereign ratings changes on stock market return. It should be noted though that most of these studies have used the conventional market model to calculate the abnormal return in the event study. The sovereign rating literature suggests that rating downgrades generally have a significant impact on the market, while rating upgrades do not have the same informative value. This study uses different benchmark models to test the validity of the results that are found in previous papers.