Sovereign Debt Rating Changes and the Stock Market
AbstractWe use an event-study methodology to analyze the effect of sovereign debt rating changes on daily stock market returns around the world. We find evidence that the stock market moves before the public announcement of a sovereign rating downgrade, resulting in a significant market reaction prior to the event, weak reaction at the event and a mild correction after the event. The results are much weaker for upgrades. Using instrumental variables techniques we build a causal case to argue that these findings are more pronounced in non-developed markets, in countries with civil (relative to common) law systems, lower measures of law and order institutional quality, and higher measures of corruption.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8743.
Date of creation: Jan 2012
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Other versions of this item:
- Panayiotis Papakyriacou & George Nishiotis & Andreas Milidonis & Alex Michaelides, 2012. "Sovereign Debt Rating Changes and the Stock Market," 2012 Meeting Papers 522, Society for Economic Dynamics.
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-03-28 (All new papers)
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- Mink, Mark & de Haan, Jakob, 2013.
"Contagion during the Greek sovereign debt crisis,"
Journal of International Money and Finance,
Elsevier, vol. 34(C), pages 102-113.
- Dominique Guegan & Bertrand K. Hassani & Xin Zhao, 2013. "Emerging Countries Sovereign Rating Adjustment using Market Information: Impact on Financial Institution Investment Decisions," Documents de travail du Centre d'Economie de la Sorbonne 13034, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
- Dominique Guegan & Bertrand Hassani & Xin Zhao, 2013. "Emerging Countries Sovereign Rating Adjustment using Market Information: Impact on Financial Institutions Investment Decisions," UniversitÃ© Paris1 PanthÃ©on-Sorbonne (Post-Print and Working Papers) halshs-00820839, HAL.
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