Abstract
This study investigates the spillover effects of sovereign credit ratings (SCR) on bond, equity, and currency markets across various African countries, addressing the critical research problem of limited exploration and understanding of SCR spillovers within and across African financial markets. Despite recognising exogenous shocks and causal relationships between SCRs and financial market returns, there is a significant deficiency in comprehensive empirical evidence specifically addressing SCR spillovers in Africa. This gap is exacerbated by unique challenges such as weak bilateral trade and financial ties, and the influence of geopolitical and climate risks. The study aims to assess how SCR announcements impact financial markets both domestically and regionally, considering market anticipation, the influence of financial development, and the role of trade and financial flows in cross-border spillovers. Utilising advanced econometric models like the Arellano-Bond Generalized Method of Moments (GMM), Dynamic Conditional Correlation (DCC) model, and Spatial Durbin Model, the study analyses time-varying volatility, endogeneity, and spatial dependence across a sample of African countries with varying levels of financial development. Findings reveal significant abnormal returns in anticipation of SCR announcements, particularly negative ones, with higher financial development reducing the frequency but not the magnitude of impacts. Negative rating events result in more substantial market declines than positive ones, and strong regional integration is suggested by significant cross-market correlations. Trade and financial flows play a pivotal role in cross-border spillovers, while weak policy frameworks exacerbate these effects. Recommendations for policymakers include enhancing financial development, regulatory frameworks, and regional cooperation, and investors are advised to diversify portfolios and monitor economic linkages. Further research is suggested on sector-specific responses and the impact of financial innovations on sovereign risk transmission.