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Sovereign credit ratings and financial markets linkages: application to European data

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  • Afonso, António
  • Furceri, Davide
  • Gomes, Pedro

Abstract

We use EU sovereign bond yield and CDS spreads daily data to carry out an event study analysis on the reaction of government yield spreads before and after announcements from rating agencies (Standard & Poor’s, Moody’s, Fitch). Our results show: significant responses of government bond yield spreads to changes in rating notations and outlook, particularly in the case of negative announcements; announcements are not anticipated at 1-2 months horizon but there is bi-directional causality between ratings and spreads within 1-2 weeks; spillover effects especially from lower rated countries to higher rated countries; and persistence effects for recently downgraded countries. JEL Classification: C23, E44, G15

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1347.

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Date of creation: Jun 2011
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Handle: RePEc:ecb:ecbwps:20111347

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Keywords: credit ratings; rating agencies; sovereign yields;

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  19. Norden, Lars & Weber, Martin, 2004. "Informational Efficiency of Credit Default Swap and Stock Markets: The Impact of Credit Rating Announcements," CEPR Discussion Papers 4250, C.E.P.R. Discussion Papers.
  20. Afonso, Antonio & Strauch, Rolf, 2007. "Fiscal policy events and interest rate swap spreads: Evidence from the EU," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 17(3), pages 261-276, July.
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