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Credit Rating Agency Announcements and the Eurozone Sovereign Debt Crises

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Author Info

  • Baum, Christopher

    (Boston College, DIW Berlin)

  • Karpava, Margarita

    (MediaCom London)

  • Schäfer, Dorothea

    (JIBS, DIW Berlin)

  • Stephan, Andreas

    ()
    (Ratio & JIBS)

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 ignificantly 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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Bibliographic Info

Paper provided by The Ratio Institute in its series Ratio Working Papers with number 224.

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Length: 34 pages
Date of creation: 04 Nov 2013
Date of revision:
Handle: RePEc:hhs:ratioi:0224

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

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  1. Alsakka, Rasha & ap Gwilym, Owain, 2013. "Rating agencies’ signals during the European sovereign debt crisis: Market impact and spillovers," Journal of Economic Behavior & Organization, Elsevier, vol. 85(C), pages 144-162.
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  3. 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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  7. Galina Hale, 2005. "Courage to Capital? A Model of the Effects of Rating Agencies on Sovereign Debt Roll–over," The Institute for International Integration Studies Discussion Paper Series iiisdp062, IIIS.
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  11. Ismailescu, Iuliana & Kazemi, Hossein, 2010. "The reaction of emerging market credit default swap spreads to sovereign credit rating changes," Journal of Banking & Finance, Elsevier, vol. 34(12), pages 2861-2873, December.
  12. Hooper, Vince & Hume, Timothy & Kim, Suk-Joong, 2008. "Sovereign rating changes--Do they provide new information for stock markets?," Economic Systems, Elsevier, vol. 32(2), pages 142-166, June.
  13. Mora, Nada, 2006. "Sovereign credit ratings: Guilty beyond reasonable doubt?," Journal of Banking & Finance, Elsevier, vol. 30(7), pages 2041-2062, July.
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