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Credit Rating Agency Announcements and the Eurozone Sovereign Debt Crisis

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Author Info

  • Christopher F. Baum
  • Margarita Karpava
  • Dorothea Schäfer
  • Andreas Stephan

Abstract

This paper studies the impact of credit rating agency (CRA) announcements on the value of the Euro and the yields of French, Italian, German and Spanish long-term sovereign bonds during the culmination of the Eurozone debt crisis in 2011-2012. The employed GARCH models show that CRA downgrade announcements negatively affected the value of the Euro currency and also increased its volatility. Downgrading increased the yields of French, Italian and Spanish bonds but lowered the German bond's yields, although Germany's rating status was never touched by CRA. There is no evidence for Granger causality from bond yields to rating announcements. We infer from these findings that CRA announcements significantly influenced crisis-time capital allocation in the Eurozone. Their downgradings caused investors to rebalance their portfolios across member countries, out of ailing states' debt into more stable borrowers' securities.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.430777.de/dp1333.pdf
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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 1333.

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Length: 34 p.
Date of creation: 2013
Date of revision:
Handle: RePEc:diw:diwwpp:dp1333

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Keywords: Credit Rating Agencies; Euro Crisis; Sovereign Debt; Euro Exchange Rate;

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  1. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
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Cited by:
  1. Chiwitt, Ulrich, 2014. "Ratingagenturen - Fluch oder Segen? Eine kritische Bestandsaufnahme," Arbeitspapiere der FOM 48, FOM Hochschule für Oekonomie & Management.

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