Rating Shock and Regime Shift: How Brazil’s 2016 Downgrade Reshaped the Ibovespa (1994-2023)

Choque de rating e mudança de regime: como o rebaixamento do Brasil em 2016 alterou a dinâmica do Ibovespa (1994-2023)

Abstract

This study investigates the effects of Brazil’s loss of investment-grade status on February 2016, on the behavior of the Bovespa index, using daily data from 1994 to 2023. A Vector Autoregression (VAR) model with multiple lags and a Chow test is employed to assess the impact of external shocks (Dow Jones, CRB Index), domestic variables (SELIC, exchange rate), and a 15-day pre-announcement dummy. Results show that a 1% increase in the Dow Jones raises the Bovespa by approximately 0.63%, indicating strong financial contagion. Domestically, higher SELIC rates negatively affect the index with a nine-day lag, while rising commodity prices support stock valuations, particularly in export-oriented sectors. Evidence of anticipatory behavior before the rating announcement suggests market participants adjusted portfolios ahead of the event. Altogether, the study reveals that Brazil’s downgrade triggered not only short-term volatility but also a regime shift in risk pricing, with long-lasting implications for sovereign credibility and portfolio decisions in emerging markets.