Relationship between country returns and country risk ratings revisited

In this thesis, the relationship between Country Credit Rating or CCR and international markets returns is examined. Tests also are conducted of the use of CCR as a global explanatory variable, and the ability of CCR to predict returns in 50 countries using two different ratings sources (Institutional Investors Country Credit Rating and International Country Risk Guide). The prediction ability of CCR is further tested using a conditional asset allocation framework. Event-study techniques are used to measure the impact of CCR changes on country returns. CCR is identified as being a local risk variable that has a higher prediction power in emerging compared to developed countries. The impact of CCR changes on stock returns varies markedly before and after 1997 for both ratings measures. The use of the Sovereign risk ratings from S&P confirms the predictability pattern in emerging countries, and the identified differences between the impact on stock returns of CCR changes before and after 1997.