Sovereign Rating News and Financial Markets Spillovers: Evidence From the European Debt Crisis

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. This paper examines the spillover effects of sovereign rating news on European financial markets during the period 2007-2010. Our main finding is that sovereign rating downgrades have statistically and economically significant spillover effects both across countries and financial markets. The sign and magnitude of the spillover effects depend both on the type of announcements, the source country experiencing the downgrade and the rating agency from which the announcements originates. However, we also find evidence that downgrades to near speculative grade ratings for relatively large economies such as Greece have a systematic spillover effects. Rating-based triggers may help explain these results. Terms of use: Documents in EconStor mayJEL-Code: G150, F360.

Do sovereign ratings cause instability in cross-border emerging CDS markets?

“…More recently, and given the severe Eurozone debt crisis, some papers have focused on analysing the impact of sovereign rating announcements on the European sovereign bond and CDS market. Candelon et al (2011), De Santis (2012, Baum et al (2016) and Drago and Gallo (2016) find significant and negative cross-border spillovers for downgrades, which agrees with the previous evidence and also implies that rating agencies announcements could spark financial instability in the sovereign debt markets. However, Afonso et al (2012) show that the spillover effects are mostly not significant for CDSs.…”

Quo Vadis, Raters? A frontier approach to identify overratings and underratings in sovereign credit risk

“…(see e.g. Alsakka and ap Gwilym, 2013;Treepongkaruna and Wu, 2012;Candelon et al, 2011). Most of these studies investigate the pattern of causality between market reactions and sovereign credit downgrades/upgrades, in other words, which one leads the other.…”

Novel Approaches on Sovereign Credit Ratings

“…• Bias b k is the positive or negative external parameter of a neuron k. It is added to the output of linear combiner u k in (10).…”

“…The realization that the illusion of high credit ratings led to crises made people lose trust in CRAs. Studies on the effects that CRAs have on crises, the duration of crisis and the later period have been carried out [2,5,10,16,32,35]. The impact of sovereign credit ratings on developing countries, in particular, has been examined and discussed by analyzing the credit ratings of developed and developing countries after the crisis period [14,23,25,26].…”