The Market Impact of Relative Agency Activity in the Sovereign Ratings Market

Hill, Patricia M.; Faff, Robert W.

doi:10.1111/j.1468-5957.2010.02220.x

Cited by 60 publications

(58 citation statements)

References 55 publications

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“…[34] discuss that the most of the incremental information value is transmitted through negative credit warnings (i.e., "outlooks," "reviews," and "watches,"), rather than actual rating 455 changes. The same conclusion is also reported in [35], [36] and [12]. Our analysis confirms instead a reputation issue attached to rating agencies: market participants do not rely on rating agencies assessment in default risks in government bonds.…”

supporting

confidence: 88%

Macroannouncements, bond auctions and rating actions in the European government bond spreads

Boffelli

Urga

2015

Journal of International Money and Finance

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This paper investigates the impact of macroannouncements, government bond auctions and rating actions on the 10-year government bond spreads for Belgium, France, Italy, the Netherlands, Spain with respect to Germany. Using a unique tick-by-tick dataset over 1/02/2009-05/31/2012, we identify the impact of the three drivers via jump and cojump detection procedures. Disentangling the pre-from the post-announcement effects, real economy and forward looking news releases from US and Euro area, country specific Spanish and German macroannouncements, and auctions hold in distressed countries such Italy and Spain have a statistically and economically significant effect.No role is played by rating actions.Keywords: Jumps, Cojumps,Government Bond Spreads, Macroannouncements, Government Bond Auctions, Rating Actions.J.E.L. Classification Numbers: C58, C12, H63, G24.Europe is under stress and integration among European countries seems more fragile than ever.Starting from the subprime crisis in 2007, markets are more aware of the differences between European countries, and this sentiment is reflected, amongst others, in increasing differentials of government bond yields. In 2008 and 2009, government bond spreads became sizable but it was in 5 2010 and 2011 that spreads substantially increase, reaching levels even higher than those experienced in the pre-Euro era. It was just after the famous Mario Draghi's "whatever it takes" in July 2012 that a more normal situation on government bond markets was restored. The European sovereign debt $ We wish to thank participants in the 12th Oxmetrics User Conference (Cass, 3-4 September 2012), in particular Siem Koopman, Sebastien Laurent, and Bill Lyons for useful suggestions. We thank Michael J. Flemming and Jan Novotny for having provided very useful comments on a previous version of the paper. The usual disclaimer applies. Special thanks to Morningstar, in particular to Richard Barden, for having made available the rich data set used in this paper. Simona Boffelli acknowledges financial support from the Centre for Econometric Analysis of Cass Business School.* Centre for Econometric Analysis, Faculty of Finance, Cass Business School, City University London, 106 Bunhill Row, London, EC1Y 8TZ, UK and Bergamo University, Italy. G.Urga@city.ac.uk, Tel: +44 (0)20 7040 8698, Fax: +44 (0)20 7040 8881. Preprint submitted to Journal of International Money and FinanceDecember 22, 2014 crisis involving, although at different extents, all the peripheral countries have questioned the much celebrated markets' self-regulatory power as well as the ability of policy makers and regulators to 10 adopt stability measures and stimulate economic growth. Thus, understanding which factors drive sovereign risk is particularly timely also for the macroeconomic consequences of the comovements associated to these factors. For instance, higher spreads deteriorate borrowing capabilities and market confidence which simultaneously impact on consumption and investment. The way to ameliorate the effects of th...

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confidence: 88%

Macroannouncements, bond auctions and rating actions in the European government bond spreads

Boffelli

Urga

2015

Journal of International Money and Finance

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“…Brooks, Faff, Hillier, and Hillier (2004) also find a negative effect of rating downgrades on stock returns, but we differ by providing evidence of information leakage before the official announcement, especially in countries with lower institutional quality. Martell (2005) and Hill and Faff (2010) further find evidence of movements in stock returns before rating announcements, but we differ from these papers by showing a causal link between sovereign institutional quality and stock market reactions prior to downgrades and by conducting an extensive analysis of preannouncement news to show that our results are driven not by concurrent news unrelated to the downgrade, but rather by the leakage of information. Afonso, Furceri and Gomes (2012) focus on sovereign bond yield responses to rating changes in EU countries and find evidence of bi-directional causality between yields and rating changes, consistent with event anticipation.…”

contrasting

confidence: 78%

The adverse effects of systematic leakage ahead of official sovereign debt rating announcements

Michaelides

Milidonis

Nishiotis

et al. 2015

Journal of Financial Economics

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a b s t r a c tRating agencies consult with local government officials several days prior to official announcements of sovereign debt rating changes, making information leakage likely. Using cross-country data from 1988 to 2012, we find evidence of information leakage. In particular, we find statistically and economically significant negative daily abnormal stock index returns prior to downgrade announcements. These effects are more pronounced in countries with lower institutional quality, and they persist during times with no downgrade rumors and no concurrent bad news in general. A mild post-announcement reversal consistent with overreaction to pre-event downgrade rumors highlights the adverse effects of such leakage and, thus, should be a policy concern for capital market regulators.

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“…We model the realized moments of asset returns as endogenous variables in the system and we take the view that the sovereign ratings drift is not necessarily explained by the system of those realized moments. This assumption is supported by the myriad of prior studies showing the significant market impact of sovereign credit ratings information (see inter alia, Alsakka and ap Gwilym, 2012a, Brooks et al, 2004, and Hill and Faff, 2010a. The sovereign ratings drift is rather determined by public information as well as the private information owned and subjectively assessed by the CRAs.…”

Section: Econometric Modellingsupporting

confidence: 57%

The effects of sovereign rating drifts on financial return distributions: Evidence from the European Union

Xuan

Brooks

Treepongkaruna

et al. 2014

International Review of Financial Analysis

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We develop a framework that allows a multivariate system of long memory processes to be conditional on specific regimes to investigate the effects of credit rating agencies (CRAs)' sovereign credit re-ratings on European stock and currency return distributions over the period from 1996 to 2012. We find evidence across rating regimes to support the usefulness of our proposed model in accommodating both long memory and regime switching features. Furthermore, we reveal that the total effects (both direct and indirect forces) of sovereign credit assessments on the first four realized moments of return distributions can be different to their direct effects on individual moments. Thus, we find the rank orders among the three major CRAs to differ for each realized moment and asset market.

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The Market Impact of Relative Agency Activity in the Sovereign Ratings Market

Abstract: credit rating , rating change , credit watch , information , sovereign ,

Cited by 60 publications

References 55 publications

Macroannouncements, bond auctions and rating actions in the European government bond spreads

Macroannouncements, bond auctions and rating actions in the European government bond spreads

The adverse effects of systematic leakage ahead of official sovereign debt rating announcements

The effects of sovereign rating drifts on financial return distributions: Evidence from the European Union

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