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Sovereign Debt Rating Changes and the Stock Market

Listed author(s):
  • Panayiotis Papakyriacou

    (University of Cyprus)

  • George Nishiotis

    (University of Cyprus)

  • Andreas Milidonis

    (University of Cyprus)

  • Alex Michaelides

    (University of Cyprus)

We use an event-study methodology to analyze the effect of sovereign debt rating changes on daily stock market returns around the world. We find evidence that the stock market moves before the public announcement of a sovereign rating downgrade, resulting in a significant market reaction prior to the event, weak reaction at the event and a mild correction after the event. The results are much weaker for upgrades. Using instrumental variables techniques we build a causal case to argue that these findings are more pronounced in non-developed markets, in countries with civil (relative to common) law systems, lower measures of law and order institutional quality, and higher measures of corruption.

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File URL: https://economicdynamics.org/meetpapers/2012/paper_522.pdf
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Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 522.

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Date of creation: 2012
Handle: RePEc:red:sed012:522
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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