Data, policy news stabilizes emerging markets trading, ratings prompt volatility, IMF researchers find

By Reshmi Basu

New York, May 5 -Data and policy announcements lower uncertainty and stabilize the trading environment while ratings actions cause greater volatility for emerging markets bonds, according to a working paper by the International Monetary Fund titled "The Impact of Macroeconomic Announcements of Emerging Market Bonds".

The authors also concluded that announcements are found to matter less for countries with more transparent policies and higher credit ratings.

The paper finds that the magnitude of volatility is country specific and that global bond market tends to react mainly to announcements of changes in the international credit ratings.

One of the platitudes of finance theory is that asset prices are affected by the arrival of new information. Previous studies have shown that macroeconomic data announcements have a significant impact on financial markets, although the impact varies across markets, said the paper's authors.

The effects of macroeconomic announcements tend to be varied, depending on what type of news it is. For instance, trade balance news would have a different impact than U.S. stock prices, noted the authors.

Through econometric methods, the authors examined the reaction of emerging markets to major domestic and international macroeconomic announcements.

By looking at the EMBI sub-index of 12 countries, the authors focused on the relative change in spreads rather than absolute change "to provide a uniform scaling and allow comparison across time and countries."

The data covered statistical releases of such macroeconomic indicators as: real GDP, industrial production, consumer prices, trade balance, and fiscal balance. To account for global factors, the authors included news of changes to the U.S. federal fund rates. Changes to domestic policy and ratings actions were also used.

The authors found that macroeconomic announcements "do not generally have a systematic effect on the daily change is spreads (with the exception of ratings announcements)."

Nonetheless, ratings announcements have significant effect on the volatility of spreads.

"Data releases tend to lower volatility of emerging market bond spreads, while rating announcements have the opposite effect," said the authors.

The authors also find that non-investment grade countries' announcement of domestic rate changes and fiscal policy have more pronounced effect on the level and volatility of spreads. Ratings announcements tend to matter less.

And broadly speaking, credit ratings announcements are less significant in times of crisis, the authors find.

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