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Credit Rating Agency Downgrades and the Eurozone Sovereign Debt Crises

  • Christopher F. Baum

    ()

    (Boston College
    DIW Berlin)

  • Margarita Karpava

    (MediaCom London)

  • Dorothea Schäfer

    ()

    (DIW Berlin
    Jönköping International Business School)

  • Andreas Stephan

    ()

    (Jönköping International Business School
    DIW Berlin)

This paper studies the impact of credit rating agency (CRA) downgrade 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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Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 841.

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Date of creation: 01 Nov 2013
Date of revision: 30 Jan 2014
Handle: RePEc:boc:bocoec:841
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