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Sovereign Debt Rating Changes, Institutional Quality and the Stock MarketAlexander MichaelidesUniversity of Cyprus - Department of Public and Business Administration; Centre for Economic Policy Research (CEPR) Andreas MilidonisUniversity of Cyprus - Department of Public & Business Administration George NishiotisUniversity of Cyprus - Department of Public and Business Administration Panayiotis PapakyriacouUniversity of Cyprus - Department of Public and Business Administration December 28, 2012 Centre for Economic Policy Research No. DP8743 Centre for Economic Policy Research No. DP8743 Abstract: We use an event-study methodology to analyze the e¤ect of sovereign debt rating changes on daily stock market returns around the world. We nd evidence that the stock market moves before the public announcement of a sovereign rating downgrade, resulting in a statistically and economically signi cant abnormal market reaction prior to the event. Using instrumental variable techniques we argue that these ndings are more pronounced in non-developed markets, in countries with civil (relative to common) legal systems, with lower measures of law and order institutional quality, and with higher measures of corruption.
Number of Pages in PDF File: 60 Keywords: sovereign ratings, event studies, international finance, institutional quality JEL Classification: G14, G15, G24 working papers seriesDate posted: December 17, 2011 ; Last revised: December 31, 2012Suggested CitationContact Information
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