The Impact of Sovereign Rating News on European Banks

Caselli, Stefano; Gandolfi, Gino; Soana, Maria Gaia

doi:10.2139/ssrn.2305821

Cited by 7 publications

(17 citation statements)

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“…Correspondingly, stock markets are most surprised by the new information. Similar findings with respect to the co-movement between sovereign ratings and bank stocks are found by Correa et al (2014) and Caselli et al (2016). By investigating the reaction of bank stocks in 37 countries to sovereign rating changes from 1995 to 2011, Correa et al (2014) find that bank's stock prices decrease significantly upon sovereign rating downgrades but are less sensitive to upgrades.…”

Section: Banks and Market Integrationsupporting

confidence: 71%

“…Therefore, banks are extremely sensitive to sovereign credit risks. Prior studies find that the stock prices of domestic banks decrease significantly upon negative sovereign rating announcements but have no significant reaction to positive ones, particularly in developed markets (Alsakka et al, 2014;Correa et al, 2014;Caselli et al, 2016). In regions with more serious information asymmetry, even positive sovereign rating announcements can have a significant positive impact on bank stocks (Williams et al, 2013(Williams et al, , 2015.…”

Section: Introductionmentioning

confidence: 99%

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Sovereign rating announcements and the integration of African banking markets

Schiereck

2019

JRF

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Purpose The purpose of this paper is to examine the information spillover of sovereign rating changes on the market valuation of bank stocks in Africa. Design methodology First, the authors apply event study methodology to evaluate the stock market reaction of African bank stocks on the announcement of sovereign rating changes. Second, the cross sections of the abnormal returns are examined by multivariate regression analyses. Third, the findings are proved for robustness. Findings The authors investigate how 37 African banks react to 203 African sovereign rating announcements from the three leading credit rating agencies over the period 2010-2016 and find that negative announcements trigger the significant positive stock reactions of African banks, especially contributed by banks in the non-reviewed African countries. These unusual reactions can be explained by the low integration and the severe information asymmetry of African capital markets. The authors further locate the influencing factors of banks’ reactions and show that rating downgrades magnify the abnormal effects while the membership of the African Free Trade Zone mildens the stock market reactions. Research limitations/implications Limitations are given by the limited sample size. There are only limited numbers of publicly listed African banks with sufficient trading data. Practical implications The paper argues for a critical dependency of African bank equity valuation in the case of sovereign debt rating changes in neighbor countries. This observation is important for the risk assessment of African banking assets. Originality/value The paper is the first to examine stock market reactions on sovereign rating announcements for the evaluation of capital market integration in Africa. It thereby underlines the usefulness of this simply to apply approach as an instrument for ongoing examining the progress in capital market development in emerging countries.

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Section: Banks and Market Integrationsupporting

confidence: 71%

Section: Introductionmentioning

confidence: 99%

Sovereign rating announcements and the integration of African banking markets

Schiereck

2019

JRF

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“…Alsakka et al (2014) reported similar results in Europe, especially during the crisis and for the peripheral countries. Moreover, Caselli et al (2014) found that sovereign rating downgrades have a negative effect on bank share prices in the eurozone, while rating upgrades have no influence. However, since sovereign risk impacts negatively on banks' balance sheets and reduces their government guarantees, it is likely that the reduction in banks' rating observed in these studies is more a consequence of the other three channels mentioned previously.…”

Section: Contagion Between Bank and Sovereign Riskmentioning

confidence: 99%

“…On the one hand, the coefficient β2 measures the effects of sovereign risk (SR) on stock returns before the SSM. We expect this coefficient to have a negative and significant sign, since before the SSM an increase in sovereign risk would rapidly reduce the stock returns of the domestic banks (Caselli et al 2014). On the other hand, the coefficient β3 captures the differential effects of sovereign risk on stock returns after the SSM in relation to the period before it.…”

Section: Econometric Model and Datamentioning

confidence: 99%

The single supervision mechanism and contagion between bank and sovereign risk

2019

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The objective of this article is to analyse how the Single Supervision Mechanism (SSM), the first pillar of the European Banking Union, affects contagion between bank and sovereign risk in the eurozone. Additionally, we test whether this contagion is transmitted from banks to sovereigns or vice versa, and how this transmission differs before and after the SSM. On the one hand, using quarterly data from 80 banks and 13 eurozone countries over the period 2009-2016 (2,441 observations), we do not find solid evidence that the SSM reduces contagion from sovereign risk to banks' stock returns. On the other hand, the analysis of credit default swap (CDS) spreads comprises quarterly data from 25 banks and 10 eurozone countries between 2009 and 2016 (771 observations). We find that the announcement of the SSM in March 2013 reduces contagion between bank and sovereign CDS spreads. Additionally, before the announcement of the SSM, an increase in sovereign risk does not alter contagion. However, after this announcement, an increase in sovereign risk leads to lower contagion. Therefore, the announcement of the SSM has an immediate effect on CDS spreads, while there is not enough evidence for banks' stock returns.

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“…What started as a sovereign debt crisis in Greece soon transmitted to Portugal, Ireland, Cyprus and, at least partially, to Spain and Italy. It soon became clear for Europe that, beneath the sovereign debt crisis surface, there also existed a severe banking crisis (Caselli et al ., ). The propagation of financial distress from one country to another, with stock markets, bond yields and credit default swaps (CDS) spreads being affected, makes the studying of the transmission of extreme returns more pertinent than ever…”

Section: Introductionmentioning

confidence: 97%