Sovereign Debt Challenges in the Commonwealth Caribbean: Stock Market Reaction to Sovereign Debt Restructurings and Credit Rating Reviews

Date: 11/13/2015
Author(s): Justin Robinson and Prosper Bangwayo-Skeete

Created 13 Nov, 2015
Categories Working Papers
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This study investigates the reaction of stock prices to sovereign debt restructurings and credit rating reviews in six frontier stock markets. The study uses the event study methodology corrected for the impact of thin trading to investigate stock market reaction to sovereign debt restructurings and credit ratings reviews in the Commonwealth Caribbean region. The study finds that stock markets in the region do not generally react to sovereign debt restructurings and credit ratings reviews. There was a positive reaction to the Jamaica 2010 sovereign debt restructuring, a negative reaction to the St. Kitts and Nevis 2013 sovereign debt restructuring, and no reaction to any of the other eight sovereign debt restructurings or seventeen sovereign credit rating reviews that occurred over the sample period January 1 2001 to June 30 2015. In cases where there was a stock market reaction, the reaction was delayed, pointing to a degree of semi-strong form market inefficiency.

On the surface, the results suggest that despite the prominence given to sovereign debt restructurings and credit rating reviews, equity investors in the Commonwealth Caribbean either view these events as having negligible impact on corporate profitability and the returns on their investments, fully anticipate these events hence little or no stock market reaction to the announcement of the event, or there are structural features of the stock markets that render them semi-strong form inefficient. We suggest that the lack of a stock market response to events of significant economic impacts in the vast majority of cases, and a delayed reaction where one exists, may point to semi-strong form efficiency in Commonwealth Caribbean stock markets due to market microstructure weaknesses such as trading costs, information asymmetry faced by minority investors and high ownership concentration amongst long term strategic investors. If this is so, market prices may not be reflective of current or recent information about firms’ prospects, and the usefulness of these prices to a variety of stakeholders may be questionable.



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