Sovereign credit ratings, market volatility, and financial gains
The reaction of EU bond and equity market volatilities to sovereign rating announcements (Standard & Poor’s, Moody’s, and Fitch) is investigated using a panel of daily stock market and sovereign bond returns. The parametric volatilities are filtered using EGARCH specifications. The estimation results show that upgrades do not have significant effects on volatility, but downgrades increase stock and bond market volatility. Contagion is present, with sovereign rating announcements creating interdependence among European financial markets with upgrades (downgrades) in one country leading to a decrease (increase) in volatility in other countries. The empirical results show also a financial gain and risk (value-at-risk) reduction for portfolio returns when taking into account sovereign credit ratings’ information for volatility modelling, with financial gains decreasing with higher risk aversion. JEL Classification: C22, C23, E44, G11, G15, H30
|Date of creation:||Mar 2014|
|Contact details of provider:|| Postal: 60640 Frankfurt am Main, Germany|
Phone: +49 69 1344 0
Fax: +49 69 1344 6000
Web page: http://www.ecb.europa.eu/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Gande, Amar & Parsley, David C., 2005.
"News spillovers in the sovereign debt market,"
Journal of Financial Economics,
Elsevier, vol. 75(3), pages 691-734, March.
- António Afonso & Michael G. Arghyrou & Alexandros Kontonikas, 2012.
"The determinants of sovereign bond yield spreads in the EMU,"
2012_14, Business School - Economics, University of Glasgow.
- Afonso, António & Arghyrou, Michael G. & Kontonikas, Alexandros, 2015. "The determinants of sovereign bond yield spreads in the EMU," Working Paper Series 1781, European Central Bank.
- António Afonso & Michael G. Arghyrou & Alexandros Kontonikas, 2012. "The determinants of sovereign bond yield spreads in the EMU," Working Papers Department of Economics 2012/36, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
- Kontonikas, Alexandros & Arghyrou, Michael G. & Afonso, António, 2012. "The determinants of sovereign bond yield spreads in the EMU," SIRE Discussion Papers 2012-88, Scottish Institute for Research in Economics (SIRE).
- repec:ags:aaea07:387 is not listed on IDEAS
- Amira, Khaled & Taamouti, Abderrahim & Tsafack, Georges, 2011.
"What drives international equity correlations? Volatility or market direction?,"
Journal of International Money and Finance,
Elsevier, vol. 30(6), pages 1234-1263, October.
- Tsafack, Georges & Taamouti, Abderrahim & Amira, Khaled, 2009. "What Drives International Equity Correlations? Volatility or Market Direction?," UC3M Working papers. Economics we094122, Universidad Carlos III de Madrid. Departamento de Economía.
- Helmut Reisen & Julia Maltzan, 1998.
"Sovereign credit ratings, emerging market risk and financial market volatility,"
Intereconomics: Review of European Economic Policy,
Springer;German National Library of Economics;Centre for European Policy Studies (CEPS), vol. 33(2), pages 73-82, March.
- Reisen, Helmut & von Maltzan, Julia, 1998. "Sovereign credit ratings, emerging market risk and financial market volatility," HWWA Discussion Papers 55, Hamburg Institute of International Economics (HWWA).
- Otranto, Edoardo, 2010. "Identifying financial time series with similar dynamic conditional correlation," Computational Statistics & Data Analysis, Elsevier, vol. 54(1), pages 1-15, January.
- Kraeussl, Roman, 2003.
"Do Credit Rating Agencies Add to the Dynamics of Emerging Market Crises?,"
CFS Working Paper Series
2003/18, Center for Financial Studies (CFS).
- Kraussl, Roman, 2005. "Do credit rating agencies add to the dynamics of emerging market crises?," Journal of Financial Stability, Elsevier, vol. 1(3), pages 355-385, April.
- Roman Kraeussl, "undated". "Do Credit Rating Agencies Add to the Dynamics of Emerging Market Crises," Working Papers 0304, University of Crete, Department of Economics.
- Charles M. Jones & Owen Lamont & Robin L. Lumsdaine, "undated".
"Macroeconomic News and Bond Market Volatility,"
CRSP working papers
333, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- Miller,Ronald E. & Blair,Peter D., 2009. "Input-Output Analysis," Cambridge Books, Cambridge University Press, number 9780521739023, October.
- Marian Micu & Eli M Remolona & Philip D. Wooldridge, 2006. "The price impact of rating announcements: which announcements matter?," BIS Working Papers 207, Bank for International Settlements.
- Ding, Zhuanxin & Granger, Clive W. J. & Engle, Robert F., 1993. "A long memory property of stock market returns and a new model," Journal of Empirical Finance, Elsevier, vol. 1(1), pages 83-106, June.
- Rabah Arezki & Bertrand Candelon & Amadou Sy, 2011.
"Sovereign Rating News and Financial Markets Spillovers: Evidence from the European Debt Crisis,"
CESifo Working Paper Series
3411, CESifo Group Munich.
- Bertrand Candelon & Amadou N Sy & Rabah Arezki, 2011. "Sovereign Rating News and Financial Markets Spillovers; Evidence from the European Debt Crisis," IMF Working Papers 11/68, International Monetary Fund.
- Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-370, March.
- Manabu Asai & Michael McAleer, 2010.
"Alternative Asymmetric Stochastic Volatility Models,"
KIER Working Papers
739, Kyoto University, Institute of Economic Research.
- Manabu Asai & Michael McAleer, 2011. "Alternative Asymmetric Stochastic Volatility Models," Econometric Reviews, Taylor & Francis Journals, vol. 30(5), pages 548-564, October.
- Manabu Asai & Michael McAleer, 2009. "Alternative Asymmetric Stochastic Volatility Models," CIRJE F-Series CIRJE-F-655, CIRJE, Faculty of Economics, University of Tokyo.
- Manabu Asai & Michael McAleer, 2009. "Alternative Asymmetric Stochastic Volatility Models," CARF F-Series CARF-F-166, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
- Asai, M. & McAleer, M.J., 2010. "Alternative Asymmetric Stochastic Volatility Models," Econometric Institute Research Papers EI 2010-69, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
- Manabu Asai & Michael McAleer, 2010. "Alternative Asymmetric Stochastic Volatility Models," Working Papers in Economics 10/70, University of Canterbury, Department of Economics and Finance.
- repec:ags:aaea07:423 is not listed on IDEAS
- António Afonso & Davide Furceri & Pedro Gomes, 2011.
"Sovereign credit ratings and financial markets linkages: application to European data,"
Working Papers Department of Economics
2011/14, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
- Afonso, António & Furceri, Davide & Gomes, Pedro, 2012. "Sovereign credit ratings and financial markets linkages: Application to European data," Journal of International Money and Finance, Elsevier, vol. 31(3), pages 606-638.
- Afonso, António & Furceri, Davide & Gomes, Pedro, 2011. "Sovereign credit ratings and financial markets linkages: application to European data," Working Paper Series 1347, European Central Bank.
- Hull, John & Predescu, Mirela & White, Alan, 2004. "The relationship between credit default swap spreads, bond yields, and credit rating announcements," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2789-2811, November.
- Jan Oosterhaven & Dirk Stelder, 2002. "Net Multipliers Avoid Exaggerating Impacts: With A Bi-Regional Illustration for the Dutch Transportation Sector," Journal of Regional Science, Wiley Blackwell, vol. 42(3), pages 533-543.
- Lawrence R. Glosten & Ravi Jagannathan & David E. Runkle, 1993.
"On the relation between the expected value and the volatility of the nominal excess return on stocks,"
157, Federal Reserve Bank of Minneapolis.
- Glosten, Lawrence R & Jagannathan, Ravi & Runkle, David E, 1993. " On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks," Journal of Finance, American Finance Association, vol. 48(5), pages 1779-1801, December.
- 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.
- Helmut Reisen & Julia von Maltzan, 1999.
"Boom and Bust and Sovereign Ratings,"
OECD Development Centre Working Papers
148, OECD Publishing.
- Monica Billio & Massimiliano Caporin, 2007.
"Market linkages, variance spillovers and correlation stability: empirical evidences of financial contagion,"
2007_18, Department of Economics, University of Venice "Ca' Foscari".
- Billio, Monica & Caporin, Massimiliano, 2010. "Market linkages, variance spillovers, and correlation stability: Empirical evidence of financial contagion," Computational Statistics & Data Analysis, Elsevier, vol. 54(11), pages 2443-2458, November.
- Erik Dietzenbacher, 2005. "More on multipliers," Journal of Regional Science, Wiley Blackwell, vol. 45(2), pages 421-426.
- repec:edn:sirdps:423 is not listed on IDEAS
- Gallo, Giampiero M. & Otranto, Edoardo, 2008.
"Volatility spillovers, interdependence and comovements: A Markov Switching approach,"
Computational Statistics & Data Analysis,
Elsevier, vol. 52(6), pages 3011-3026, February.
- Giampiero Gallo & Edoardo Otranto, 2007. "Volatility Spillovers, Interdependence and Comovements: A Markov Switching Approach," Econometrics Working Papers Archive wp2007_11, Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti".
- Charlotte Christiansen, 2007. "Volatility-Spillover Effects in European Bond Markets," European Financial Management, European Financial Management Association, vol. 13(5), pages 923-948.
- Tim Bollerslev & Julia Litvinova & George Tauchen, 2006. "Leverage and Volatility Feedback Effects in High-Frequency Data," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 4(3), pages 353-384.
- 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.
- Miller,Ronald E. & Blair,Peter D., 2009. "Input-Output Analysis," Cambridge Books, Cambridge University Press, number 9780521517133, October.
- Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-350, July.
- João Do Amaral & João Dias & João Lopes, 2012. "A new kind of production and value-added multiplier for assessing the scale and structure effects of demand shocks in input–output frameworks," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 49(1), pages 103-115, August.
- Ferreira, Miguel A. & Gama, Paulo M., 2007. "Does sovereign debt ratings news spill over to international stock markets?," Journal of Banking & Finance, Elsevier, vol. 31(10), pages 3162-3182, October.
- Volker G. Heinke, 2006. "Credit spread volatility, bond ratings and the risk reduction effect of watchlistings," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 11(4), pages 293-303.
- Jorge Saba Arbache, 2001. "Trade Liberalisation and Labor Markets in Developing Countries: Theory and Evidence," Studies in Economics 0112, School of Economics, University of Kent.
- Norden, Lars & Weber, Martin, 2004.
"Informational efficiency of credit default swap and stock markets: The impact of credit rating announcements,"
Journal of Banking & Finance,
Elsevier, vol. 28(11), pages 2813-2843, November.
- 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.
- Robert F. Engle & Giampiero M. Gallo & Margherita Velucchi, 2012. "Volatility Spillovers in East Asian Financial Markets: A Mem-Based Approach," The Review of Economics and Statistics, MIT Press, vol. 94(1), pages 222-223, February.
- Jorion, Philippe, 1986. "Bayes-Stein Estimation for Portfolio Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(03), pages 279-292, September.
When requesting a correction, please mention this item's handle: RePEc:ecb:ecbwps:20141654. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Official Publications)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.