The national market impact of sovereign rating changes

Brooks, Robert Darren; Faff, Robert W.; Hillier, David; Hillier, Joseph

doi:10.1016/s0378-4266(02)00406-5

Cited by 238 publications

(185 citation statements)

References 20 publications

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“…In particular, we document a significant rise in co-movement in the post-bailout period between BCDS and SCDS and the VSTOXX volatility index. These findings are supported by the empirical evidence on the effects of changes in sovereign credit 24 ratings on financial instability (Kaminsky and Schmukler 2002) and stock market returns (Brooks et al 2004, Correa et al 2014. 18 Moreover, we find that the effects of unexpected changes to BCDS and SCDS spreads on the VSTOXX volatility index and on the EUROSTOXX stock index are more pronounced and stronger in a more volatile regime, reflecting an increased incidence of contagion across financial markets.…”

Section: Resultssupporting

confidence: 74%

The quest for banking stability in the euro area: The role of government interventions

Kizys

Paltalidis

Vergos

2016

Journal of International Financial Markets, Institutions and Mo

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Use policyThe full-text may be used and/or reproduced, and given to third parties in any format or medium, without prior permission or charge, for personal research or study, educational, or not-for-prot purposes provided that:• a full bibliographic reference is made to the original source • a link is made to the metadata record in DRO • the full-text is not changed in any way The full-text must not be sold in any format or medium without the formal permission of the copyright holders.Please consult the full DRO policy for further details. AbstractWe build upon a Markov-Switching Bayesian Vector Autoregression (MSBVAR) model to study how the credit default swaps market in the euro area becomes an important chain in the propagation of shocks through the entire financial system. The study sheds light on the regime-dependent interconnectedness between the risk of investing in banking and public sector bonds and provides novel evidence that a rise in sovereign debt, due to the countercyclical fiscal policy measures, is perceived by stock market investors as a burden on growth prospects. We also document that government interventions in the banking sector deteriorate the credit risk of sovereign debt. Higher risk premium required by investors for holding riskier government bonds depresses the sovereign debt market, it impairs banks" balance sheets, and it depresses the collateral value of loans leading to bank retrenchment. The ensuing two-way banking-fiscal feedback loop indicates that government interventions do not necessarily stabilize the banking sector.JEL Classification: C11, C58, G01, G21, G28.

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Section: Resultssupporting

confidence: 74%

The quest for banking stability in the euro area: The role of government interventions

Kizys

Paltalidis

Vergos

2016

Journal of International Financial Markets, Institutions and Mo

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“…Brooks, Faff, Hillier and Hillier (2004) were among the first to look at aggregate stock market returns surrounding sovereign credit rating changes. Their sample includes rating changes over the period .…”

Section: "European Stocks Closed Sharply Lower Monday As Action To Bmentioning

confidence: 99%

Creditor Nations’ Equity Indexes and the U.S. Debt Downgrade

Nippani¹,

Washer²

2012

IJEF

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On Friday, August 5, 2011 Standard and Poor's rating agency downgraded long-term U.S. Treasury debt from AAA to AA+ for the first time in history. In this study, the impact of this downgrade on world stock markets is examined. We analyze the immediate effect of this downgrade on leading stock indices of 31 nations owning U.S. Treasury debt. We find that the downgrade had a marked effect on the first trading day following the announcement. It truly was a macroeconomic event. We further examine whether return differentials were partially explained by the level of U.S. debt that each country possessed (both on an absolute and relative basis). We find no evidence of this relationship, which suggests equity markets in countries owning considerable Treasury securities suffered no more or less than equity markets in countries with less U.S. Treasury debt.

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“…As such, sovereign credit ratings are deemed to be a reference measure of country risk. Much of the literature has focused on its short-term information (predictive) content for financial market returns, interdependence and crises (see for example, Kaminsky and Schmukler, 1999;Brooks et al, 2004;Mora, 2006;Gande and Parsley, 2005;and Ferreira and Gama, 2007). It is conceivable that there are many risk factors simultaneously influencing a country's credit rating including political and other expropriation risk, inflation, exchange rate volatility and controls, the country's industry composition, economic viability and sensitivity to global economic shocks.…”

Section: Introductionmentioning

confidence: 99%

Sovereign Credit Ratings, Capital Flows and Financial Sector Development in Emerging Markets

Kim

2017

World Scientific Studies in International Economics

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How does the sovereign credit ratings history provided by independent ratings agencies affect domestic financial sector development and international capital inflows to emerging countries? We address this question utilizing a comprehensive dataset of sovereign credit ratings from Standard and Poor's from 1995-2003 for a cross-section of 51 emerging markets. Within a panel data estimation framework, we examine financial sector development and the influence of sovereign credit ratings provision, controlling for various economic and corporate governance factors identified in the financial development literature. We find strong evidence that our sovereign credit rating measures do affect financial intermediary sector developments and capital flows. We find that i) long-term foreign currency sovereign credit ratings are important for encouraging financial intermediary development and for attracting capital flows. ii) Long-term local currency ratings stimulate domestic market growth but discourage international capital flows. iii) Short-term ratings (both foreign and local currency denominated) retard all forms of financial developments and capital flows. There are important implications in this research for policy makers to encourage the provision of longerterm credit ratings to promote financial development in emerging economies.JEL classification: E44, E65, F33, F34, G15

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The national market impact of sovereign rating changes

Cited by 238 publications

References 20 publications

The quest for banking stability in the euro area: The role of government interventions

The quest for banking stability in the euro area: The role of government interventions

Creditor Nations’ Equity Indexes and the U.S. Debt Downgrade

Sovereign Credit Ratings, Capital Flows and Financial Sector Development in Emerging Markets

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